The staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC) recently provided guidance on applying its rules regarding communications in connection with securities offerings, tender offers, business combinations and proxy contests when statements are made utilizing certain social media channels. The staff’s guidance permits the use of a hyperlink to information required by certain rules when a character- or text-limited social media channel such as Twitter is used for a regulated communication, and also confirms that, at least in the context of a securities offering, a communication that has been re-transmitted by a third party that is not an offering participant or someone acting on behalf of the issuer is not attributable to the issuer for the purposes of the rules that apply to such communication.
SECURITIES OFFERING COMMUNICATIONS
Rule 134 under the Securities Act of 1933, as amended (the “Securities Act”), permits an issuer conducting a registered securities offering to make limited communications that will not be deemed to be a prospectus or free writing prospectus, provided that the communication includes no more information than is permitted by the rule and the communication includes specific legends, including the statement required by Rule 134(b)(1) and information required by Rule 134(b)(2), unless the conditions of Rule 134(c) are met, as well as the statement required by Rule 134(d) if the communication solicits from a recipient an offer to buy the security or requests the recipient to indicate whether he or she might be interested in the security.
Rule 134(b)(1) provides that if the registration statement has not yet become effective, the following statement must be included:
A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective.
Rule 134(b)(2) indicates that the notice must include the name and address of a person or persons from whom a written prospectus for the offering, meeting the requirements of Section 10 of the Securities Act, other than a free writing prospectus, including a price range where required, may be obtained.
Rule 134(d) provides that a communication sent or delivered to any person which is accompanied or preceded by a prospectus which meets the requirements of Section 10 of the Securities Act (other than a free writing prospectus), including a price range where required, at the date of such communication, may solicit from the recipient of the communication an offer to buy the security or request the recipient to indicate whether he or she might be interested in the security, if the communication contains substantially the following statement:
No offer to buy the securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date.
Recognizing the growing interest in the use of social media, in Securities Act Rules Compliance and Disclosure Interpretations Question 110.01, the staff indicates that it would not object to the use of an active hyperlink to satisfy the requirements of Rule 134(b) and Rule 134(d) in limited circumstances when:
- The electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text may be included in the communication;
- The inclusion of the entire required statements, together with the other information in the communication, would cause the communication to exceed the limit on the number of characters or amount of text; and
- The communication contains an active hyperlink to the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.
The staff points out that where an electronic communication is capable of actually including the required statements, along with the other information, without exceeding a limit on the number of characters or amount of text, then the use of the hyperlink would not be appropriate. Therefore, the guidance appears to be limited to those micro-blogging social media channels with character or text limitations such as Twitter, rather than other social media channels, such as Facebook, which permit longer postings.
The staff took a similar approach in Securities Act Rules Compliance and Disclosure Interpretations Question 232.15, which provides an interpretation with respect to Rule 433 under the Securities Act. Rule 433 provides conditions for the use of free writing prospectuses (as defined in Securities Act Rule 405), and any free writing prospectus (other than free writing prospectuses that comply with Rule 433(f)(1)) must contain the legend required by Rule 433(c)(2)(i). The Rule 433(c)(2)(i) legend states:
The issuer has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, the issuer, any underwriter or any dealer participating in the offering will arrange to send you the prospectus if you request it by calling toll-free 1-8[xx-xxx-xxxx].
The legend also may provide an email address at which the documents can be requested and may indicate that the documents also are available by accessing the issuer’s website and provide the Internet address and the particular location of the documents on the website.
The staff notes that, under the same conditions set forth above with respect to Rule 134, an issuer can use an active hyperlink to provide the legend required by Rule 433(c)(2)(i).
The staff also points out, in Securities Act Rules Compliance and Disclosure Interpretations Questions 110.02 and 232.16, that an issuer does not need to ensure compliance with Rule 134 and Rule 433 for electronic communications that are re-transmitted by a third party that is not an offering participant or acting on behalf of the issuer, as long as the issuer has no involvement in the third party’s re-transmission of the information other than having initially prepared the communication in compliance with Rule 134 or Rule 433. In this regard, the staff confirms in the context of social media platforms the guidance that the Commission provided in Release No. 33-8591 (July 19, 2005), which stated:
[W]hether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or other offering participant depends upon whether the issuer or other offering participant has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information.
The staff’s guidance appears to be directed at situations where an offering communication prepared in compliance with Rule 134 or Rule 433 is re-tweeted by a third party, or otherwise re-transmitted via a similar social media channel.
BUSINESS COMBINATION COMMUNICATIONS
The recent staff guidance also addresses an analogous rule in the context of business combination transactions, Securities Act Rule 165. In Securities Act Rules Compliance and Disclosure Interpretations Question 164.02, the staff notes that the legend required by paragraph (c)(1) of Rule 165 may be provided by use of an active hyperlink, subject to the same conditions specified for Rule 134 notices and Rule 433 free writing prospectuses discussed above. Rule 165(c)(1) specifies that a communication made under the rule must contain a prominent legend that urges investors to read the relevant documents filed or to be filed with the Commission because they contain important information, and the legend also must explain to investors that they can get the documents for free at the Commission’s website and describe which documents are available free from the offeror.
The staff also notes that this same interpretation applies with respect to similar legend requirements specified in Rule 14a-12 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which deals with written communications that constitute solicitations, and pre-commencement written communications in connection with tender offers that are subject to Exchange Act Rules 13e-4(c), 14d-2(b) and 14d-9(a).
The staff’s guidance addresses lingering concerns as to how social media platforms such as Twitter can be integrated into the process of making communications regarding a registered securities offering, business combination transaction, proxy contest or tender offer. While this guidance provides flexibility to utilize these forms of communications more effectively, issuers must be mindful of all applicable Commission filing, civil liability and anti-fraud provisions that are applicable to communications made under these rules.