© Sheppard Mullin Richter & Hampton LLP 2011

The World of Social Media and the Federal Securities Laws

By: Jeralin R. Cardoso

Social Media Statistics

General Use of Social MediaEstimated to be over 640 million Facebook users worldwide and over 200 million registered Twitter accounts.

Company Use of Social Media2010 Q4 Study by Web Systems found that with 326 public companies studied:

65% are using Twitter for shareholder outreach; 37% are using Facebook; 29% are using YouTube; and 10% are using a corporate blog for investor relations

Regulation FD

Public companies are required to make public disclosure of material nonpublic information.

Public Disclosure is defined as either furnishing or filing a Form 8-K or disseminating information through a method that is “reasonably designed to provide broad non-exclusionary distribution of information to the public.

Regulation FD Compliance and Social Media Postings

2008 SEC Guidance (facts and circumstances test)

Must be published through a “recognized channel” of distribution

• Disclosure Policy made known to Investors

• Prominent links to social media accounts on Company’s websites

• Monitor dissemination of information to determine extent to which reaches intended audiences

Information must be disseminated in a manner designated to reach the general public

• Information easily accessible

• Draw investors’ attention to the information

• Determine whether message is distributed to all or a select few

Company Personnel Not Covered by Regulation FD

Regulation FD Applies to Certain Types of Speakers: Senior Officials; Directors and Executive Officers; Investor and Public Relations Officers; Other persons with similar functions; and Any other officer, employee, or agent of an issuer who

regularly communicates with any enumerated persons.

A Company cannot avoid Regulation FD compliance by having a non-covered person make selective disclosure.

If non-covered person is directed to make selective disclosure by a senior official then such senior official will be held responsible for the selective disclosure.

Antifraud Rules

Material Misstatements and Omissions of Fact

Company can be held liable for third party information through concepts of entanglement or adoption

• Adding hyperlinks to social media posts• Responding to a comment via Social Media post

Twitter is limited to 140 characters per tweet

Employees acting as a representative of a company on an internet site cannot avoid the antifraud rules by purporting to speak in their individual capacity

Securities Offerings Considerations

Public Offerings• Monitor social media

communications to make sure no written offers are being made other than by means of a prospectus or free-writing prospectus

• Companies considering an IPO should monitor social media communications to make sure in compliance with the gun-jumping rules of the SEC

Private Offerings• Under Regulation D,

companies are required to refrain from offering or selling securities through general solicitation or general advertising

• SEC historical view on whether a communication is a general solicitation depended upon whether the relationship between the parties predated the securities offering

Current Securities Laws Under Review

500 Shareholder Limit

Section 12(g) of the Securities Exchange Act of 1934 requires a company to register with the SEC within 120 days after the last date of its fiscal quarter if the securities are “held of record” by 500 or more persons and the “total assets” of the company exceeds $10 million.

General Solicitation Ban

Private securities offerings are permitted if not based on

general solicitation.

Jeralin Cardoso

Sheppard, Mullin, Richter & Hampton LLP

12275 El Camino Real, Suite 200

San Diego, CA 92130

858-720-7431

jcardoso@sheppardmullin.com