SEC Guides on Use of Corporate Blogs; Entanglement and Adoption Liability Possible

For the first time in eight years, the SEC has issued guidance on corporate electronic communications. This guidance is on areas where the convergence of the Internet and federal securities regulation intersect in ways that were unimaginable only a few years ago. Release No. 34-58288.

In the release, the SEC provided guidance on a company’s use of Internet blogs, including CEO blogs and investor relations blogs. First off, the Commission emphasized that the antifraud provisions apply to company sponsored blogs. That said, the SEC granted that companies can use blogs for a variety of purposes, including the exchange of opinions and ideas between management or employees and various stakeholders. The open format of blogs makes them an attractive forum for ongoing communications between and among companies and their clients, customers, suppliers, shareholders and other stakeholders.

For example, a manufacturing company could sponsor a blog for its staff tasked with designing, developing and troubleshooting products. Vendors and end-users likely would find such a forum helpful. Shareholders also may welcome the opportunity to view or join a discussion of the uses of a company’s existing products to better understand one of the means a company derives revenues, especially with the front-line employees responsible for those products.

But companies hosting or participating in blogs must always be aware that, while blogs can be informal and conversational in nature, statements made there by the company or by a person acting on behalf of the company will not be treated differently from other company statements when it comes to the antifraud provisions of the federal securities laws. Moreover, employees acting as representatives of the company must be aware of their responsibilities in these forums, which they cannot avoid by purporting to speak in their individual capacities.

Importantly, the SEC said that companies cannot require investors to waive the protections of the federal securities laws as a condition to participating in a blog. Any term or condition of a blog requiring users to agree not to make investment decisions based on the blog’s content or disclaiming liability for damages of any kind arising from the use or inability to use the blog is inconsistent with the federal securities laws and violates the anti-waiver provisions of the federal securities laws.

But the SEC assured that, while a company is responsible for its own statements on a blog, it is not responsible for the statements that third parties post on a website the company sponsors, nor is it obliged to respond to or correct misstatements made to third parties. But the SEC did caution that the company may be held responsible under the adoption or entanglement theories if it adopts or endorses a third-party statement made on the blog.

The adoption and entanglement theories of liability have been part of federal securities regulation for quite some time; and have been accepted and used by the federal courts and the SEC. A company can involve itself in the preparation of third-party information to such an extent that it can become entangled with the third-party information. And, a company can adopt third-party information by endorsing it after its publication.