Fear the Twitter and watch the Insta!: emerging commercial opportunities and regulatory risks as securities markets participants, regulators and digital influencers converge on social media
Friday 14 April 2023
Reporter
Philippe Tardif
Borden Ladner Gervais, Toronto, Ontario
PTardif@blg.com
Session Co-Chairs
Tom Fagernäs Krogerus, Helsinki
Cecilia M Mairal Marval O'Farrell & Mairal, Buenos Aires
Panellists
Paul M Dudek Latham & Watkins, Washington, DC
Tim Gordon Gilbert & Tobin, Sydney
Gail Ong WongPartnership, Singapore
Tuesday 1 November 2022
Introduction
As the use of social media as a means of communication for securities markets is increasing, it continues to impose challenges for market participants and regulators, who must abide by and enforce rules that were written with print media in mind. Simultaneously, social media is less costly, almost instantaneous and easily accessed, providing almost infinite possibilities for marketing, information sharing and investor relations.
The session discussed how financial regulation and the regulation of securities offerings has evolved in the face of the growing use of social media by issuers, investors, broker dealers and intermediaries, and what more market participants and regulators can do to efficiently, but fairly, harness the power of social media.
Overview of the panel discussion
The panel discussed the legal implications of social media strategies employed by public companies, shareholders and activists. The use of social media raises lots of regulatory issues related to securities. Four hypothetical scenarios involving social media communications were discussed: an initial public offering (IPO) and related communications; post-IPO communications by a significant shareholder and the subsequent stock resale following the expiry of a lock-up period; a ‘meme’ stock share price run up; and an activist shareholder campaign.
The first scenario
The panel reviewed the first scenario involving a hypothetical IPO by a company (the ‘company’). The panel discussed the rules in various jurisdictions relating to IPOs and related communications. The panellists noted that solicitations and communications to investors are generally not permitted before the filing of a registration statement or the filing of a final prospectus. Publicity is generally then allowed, but only to the extent of the information contained in the prospectus. Social media posts are subject to regulation in certain jurisdictions, including requirements to include prescribed legends and mandatory consistency of the disclosure with that of the prospectus.
The panel discussed the regulatory implications of inconsistencies between the information in the prospectus and the information promoted on social media, and the resulting unavailability of a safe harbour. The panel also discussed how to incorporate selling restrictions and disclaimers on social media, and how to address restrictions across jurisdictions. In certain cases, social media posts may provide a link to the prospectus. The panel also discussed the effectiveness of attempts to target publicity at a particular jurisdiction. The panel then raised the implications of social media posts that survive long after an offering is completed. A panellist provided an overview of the regulatory regime in the US and the possibility of filing a free writing prospectus in the US, a regime which is not available in Singapore or Australia.
The second scenario
The panel then considered the second scenario which involved communications by a significant shareholder in the company. The particular shareholder was subject to an underwriter’s six-month lock-up period, during which time they made public statements on social media about the company. Following the expiry of the lock-up period, the shareholder sold their shares.
Noting that comments from shareholders that are positive about their investments are not uncommon, the panel reviewed the issues surrounding deceptive or misleading communications. The market manipulation provisions in various jurisdictions were discussed. More specifically, the US Securities and Exchange Commission’s (SEC) rules (eg, Schedule 13D filings) relating to the disclosure of future plans of significant shareholders were also discussed.
The panel commented on the implications for the company where it has knowledge that is inconsistent with the statements made by shareholders. The panel then discussed the reasonable expectations of the market and the implications of disclaimers. The market manipulation concerns as they relate to social media were also raised.
The third scenario
The panel then considered the third scenario which involved communications among shareholders following downward pressure on the stock price, as a result of the sale by the significant shareholder. The shareholder’s communications resulted in the company’s stock becoming a ‘meme stock’, with the stock price increasing rapidly. The panel discussed the implications for broker dealers, with shareholders rushing to cover short positions and the resulting systemic risk. The panel also commented on the implications for alternative trading platforms when depositaries request that a platform posts additional collateral in light of increased trading volume. The extraterritorial effect of securities legislation was also discussed as well as insider trading laws. The panel commented on the distinction between platforms that are readily accessible by the public and those that are not. The panel also considered the implications of stock sales under US Regulation S of the Securities Act of 1933, and the US antifraud provisions under the Securities Exchange Act of 1934.
The fourth scenario
The fourth scenario discussed by the panel related to the use of social media by activist investors in connection with a campaign critical of the company’s management. The use of shareholder forums by shareholders was considered. The panel discussed issues relating to selective disclosure and the SEC’s Fair Disclosure Regulation (Reg FD) in the US, and what constitutes adequate dissemination in the US. The company’s obligation relating to the correction of guidance was also discussed.
Conclusion
By contextualising the use of social media in reference to four scenarios, the panel provided a thorough overview of the legal framework relevant to the use of social media by public companies, shareholders and activists.