Social media sites are transforming not only the daily lives of consumers, but also how companies interact with consumers. Here at Morrison Foerster, across all of our practice groups, we are seeing complex, cutting-edge legal issues arising out of social media. As with the Internet boom during the mid-to-late 1990s, social media is generating new legal questions at a far faster pace than the law’s ability to provide answers to such questions. In an effort to stay on top of these emerging issues, and to keep our clients and friends informed of new developments, Morrison Foerster publishes this blog devoted to the law and business of social media.<h2>ABOUT MORRISON FOERSTER</h2>Morrison Foerster is a leading global law firm that transforms complexity into advantage for its clients. Our clients include some of the largest financial institutions, banks, consulting and accounting firms, and Fortune 100, technology, and life sciences companies. Highlighting the firm’s commitment to client service, leadership in market-changing deals and impact litigation, and values-based culture, Morrison Foerster has been repeatedly recognized as one of the top 10 firms on The American Lawyer’s A-List. Year after year, the firm receives significant recognition from Chambers and The Legal 500 across their various guides, including Global, USA, Asia‑Pacific, Europe, UK, Latin America, and FinTech Legal. Our lawyers passionately care about delivering legal excellence while living our values. Morrison Foerster has a long-standing commitment to creating a culture that respects and celebrates differences, while providing an inclusive environment. The firm has achieved Mansfield Certification Plus since 2018 as a result of successfully reaching at least 30 percent women, communities of color, and LGBTQ+ lawyer representation in a notable number of current leadership roles and committees. The firm also has a long history of commitment to the community and society through providing pro bono legal services, including litigating for civil rights and civil liberties, improving public education and fostering the wellbeing of children, advocating for veterans, promoting international human rights, enforcing the right to asylum, and safeguarding the environment.

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Aaron is the chair of the firm’s Technology Transactions Group and co-chair of the Interactive + Digital Media Group. He advises clients on a wide range of complex transactions involving intellectual property and technology, including structuring and negotiating strategic licensing, development, collaboration, procurement, and distribution deals.Aaron’s practice focuses on advising both established and emerging companies in a variety of data- and technology-intensive sectors, including software, SaaS, cloud-based technology, digital media (social media, AR/VR, gaming, streaming media, AdTech), AI, healthcare, consumer electronics, e-commerce, other online business models, and mobile applications. He also maintains an active practice counseling companies on branding and marketing, trademark licensing, and content-related transactions, as well as the intellectual property aspects of mergers, acquisitions, asset spin-offs, and private equity investments.He has represented clients such as Autodesk, Meta, OpenAI, Splunk, Konami, Kaiser Permanente, SoftBank, Visa, and Yahoo, among others.Aaron has been recognized by numerous publications for his work on market-defining technology transactions. He is currently ranked by Chambers USA for “Technology Transactions.”Aaron also serves as co-editor of Socially Aware, the firm’s award-winning newsletter and blog devoted to the law and business of social media, and regularly publishes on various IP and technology-related topics. Aaron is also a sought-after speaker on new and emerging areas of law, and is a frequent presenter and panelist at conferences and legal services programs. In addition to his active practice, Aaron regularly provides pro bono assistance to various nonprofit and charitable organizations such as Common Sense Media and the Starlight Children’s Foundation. He is a member of the board of directors of California Lawyers for the Arts.While in law school at the University of California, Berkeley, Boalt Hall School of Law, Aaron served as executive editor of the California Law Review and was elected to the Order of the Coif. Following law school, Aaron served as law clerk to the Honorable William H. Orrick and the Honorable Martin J. Jenkins, both United States District Judges for the Northern District of California.

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Aaron is the chair of our Technology Transactions Group. He advises clients on a wide range of complex transactions involving intellectual property and technology, including structuring and negotiating strategic licensing, development, collaboration, procurement, and distribution deals. Aaron’s practice focuses on advising both established and emerging companies in a variety of data– and technology–intensive sectors, including software, SaaS, cloud computing, AR/VR, AI, gaming, healthcare, consumer electronics, social media, e–commerce, other online business models, and mobile applications. He also maintains an active practice counseling companies on the intellectual property aspects of mergers, acquisitions, asset spin–offs, and private equity investments.

Aaron P. Rubin

Lawrence Gallick is of counsel in the firm’s Austin office and a member of the Technology Transactions Group.Lawrence focuses his practice on technology transactions and licensing matters. His diverse experience includes advising on SaaS agreements, cross-licensing agreements, research and collaboration agreements, development agreements, and distribution agreements. He counsels a broad range of companies across the software, hardware, life sciences, biotech and FinTech spaces, as well as other entities including universities.He advises clients in connection with general corporate matters including contract negotiations, and leasing and technology placement agreements.Lawrence also serves as co-editor of <a href="https://www.sociallyawareblog.com/" target="_blank">Socially Aware</a>, the firm’s award-winning newsletter and blog devoted to the law and business of social media, and regularly publishes on various IP and technology-related topics.Prior to joining the firm, Lawrence was counsel at another major law firm. Before earning his law degree, Lawrence was a web consultant, project manager, and web developer in Portland, Oregon, where he managed and consulted on projects using industry methodologies and performed custom development and integration of content management systems.Lawrence was named a Super Lawyers “Rising Star” in 2015 and 2018–2022, and is licensed in both California and New York. Lawrence earned his J.D. from the University at Buffalo School of Law, where he was the electronic systems editor for the Buffalo Law Review and awarded the ABA-BNA Award for Excellence in the Study of Intellectual Property Law.

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Lawrence Gallick

Anthony Ramirez is a partner in the Technology Transactions Group in the New York office of Morrison Foerster.Anthony advises clients on general commercial and transactional matters. He regularly advises companies on the IP aspects of their M&A transactions. His clients include technology, digital media and content for television and music, financial services, and communications companies with diverse intellectual property assets and issues.His practice focuses on the legal aspects of developing, licensing, and commercializing technology and intellectual property, as well as negotiating general commercial contracts, including outsourcing transactions, as well as content and data licenses. He regularly assists clients with legal issues relating to licensing and commercialization of digital media and content, digital content that is distributed over the Internet or streamed, mobile applications and social media, as well as the licensing of recorded music for distribution via digital platforms. Anthony is also experienced with issues relating to open-source software, software development, artificial intelligence and machine learning, cloud-based technology, and protection of proprietary information.Anthony has extensive experience working on matters involving disruptive technologies, such as blockchain. He has helped fintech clients with general intellectual property issues in connection with terms of service for online financial products and services.Anthony is an integral part of the outside pro bono legal team for nonprofit organizations based in New York, including advising clients on legal issues regarding entertainment, social media, privacy rights, and the negotiation of outsourcing and service agreements. Anthony received his J.D. from the University of Michigan Law School in 2009. He received his B.S. from Cornell University in 2004.

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Anthony Ramirez is a partner in the Technology Transactions Group in the New York office of Morrison Foerster. He advises clients on general commercial and transactional matters. His clients include technology, media, and communications companies with considerable intellectual property assets. His practice focuses on the legal aspects of licensing and commercializing technology and intellectual property, as well as negotiating general commercial contracts. He also regularly assists clients with legal issues relating to mobile applications and social media.

Anthony M. Ramirez

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Socially Aware is devoted to the law and business of social media, proactively addressing emerging issues and keeping our clients informed of new developments. We cover fields such as artificial intelligence, privacy and data security, Section 230, intellectual property, and much more.

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Socially Aware is devoted to the law and business of social media, proactively addressing emerging issues and keeping our clients informed of new developments. We cover fields such as artificial intelligence, privacy and data security, Section 230, intellectual property, and much more.

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On December 19, 2019, the Staff of the U.S. Securities and Exchange Commission’s Division of Corporation Finance issued guidance outlining the Staff’s views about disclosure obligations that companies should consider with respect to technology, data and intellectual property risks that could arise when operations take place outside the United States. Companies should consider this guidance when preparing risk factor and other disclosures included in upcoming periodic reports and registration statements.BackgroundThe Staff notes that the SEC’s principles-based disclosure regime recognizes that new risks may arise over time, affecting different companies in different ways. For those companies that conduct business operations outside the United States, risks can arise for technology and intellectual property, particularly when operations take place in jurisdictions that do not provide protection that is comparable to the United States. The Staff observes that companies may be exposed to material risks of “theft of proprietary technology and other intellectual property, including technical data, business processes, data sets or other sensitive information.” Exposure to such risks can be heightened when companies conduct business in some foreign jurisdictions, house technology, data and intellectual property abroad, or license technology to joint ventures with foreign partners.The Staff notes that while there is no specific line-item requirement under the federal securities laws to disclose “information related to the compromise (or potential compromise) of technology, data or intellectual property,” the SEC’s disclosure requirements apply to a broad range of evolving business risks. The Staff indicates that disclosure about such matters may be necessary in risk factors, management’s discussion and analysis, the business section, legal proceedings, disclosure controls and procedures, and/or financial statements.Sources of RiskThe Staff notes that companies face the risk of theft of technology, data and intellectual property, which could occur through a direct intrusion by private parties or foreign actors (including those affiliated with or controlled by state actors). In this regard, a company could experience cyber intrusions, as well as physical theft through corporate espionage.  Indirect theft or compromise could also occur when a company’s products or components are “reverse engineered” by joint venture partners or other parties, resulting in infringement on the company’s patents or the theft of know-how or trade secrets. In addition, the Staff notes that companies may be required to “compromise protections or yield rights to technology, data or intellectual property in order to conduct business or access markets in a foreign jurisdiction, either through formal written agreements or due to legal or administrative requirements in the host nation.” The Staff cites examples such as:<ul><li>Patent license agreements pursuant to which a foreign licensee retains rights to improvements on the relevant technology, including the ability to sever such improvements and receive a separate patent, and the right to continued use of technology or intellectual property after the patent or license term of use expires;</li><li>Foreign ownership restrictions, such as joint venture requirements and foreign investment restrictions that can potentially compromise control over a company’s technology and proprietary information;</li><li>The use of unusual or idiosyncratic terms favoring foreign persons, including those associated with a foreign government, in technology license agreements, such as access and license provisions, as direct or indirect conditions to conducting business in the foreign jurisdiction; and</li><li>Regulatory requirements that restrict the ability of companies to conduct business, unless they agree to store data locally, use local services or technology in connection with their international operations, or comply with local licensing or administrative approvals that involve the sharing of intellectual property.</li></ul>Assessing and Disclosing RisksThe Staff encourages companies “to assess the risks related to the potential theft or compromise of their technology, data or intellectual property in connection with their international operations, as well as how the realization of these risks may impact their business, including their financial condition and results of operations, and any effects on their reputation, stock price and long-term value.” The Staff notes that when these risks are material to investment and voting decisions, the risks should be disclosed in a manner that allows investors to evaluate these risks “through the eyes of management.” The Staff states that disclosure about these risks should be specifically tailored to a company’s unique facts and circumstances, and that “hypothetical disclosure of potential risks is not sufficient to satisfy a company’s reporting obligations.”  The Staff suggests that companies consider the following questions when assessing and disclosing risks:<ul><li>Is there a heightened risk to your technology or intellectual property because you have or expect to maintain significant assets or earn a material amount of revenue abroad?</li><li>Do you operate in an industry or foreign jurisdiction that has caused, or may cause, you to be particularly susceptible to the theft of technology or intellectual property or the forced transfer of technology?  Do you believe that your products have been, or may be, subject to counterfeit and sale, including through e-commerce?</li><li>Have you directly or indirectly transferred or licensed technology or intellectual property to a foreign entity or government, such as through the creation of a joint venture with a foreign entity? Do you store technology or intellectual property locally in a foreign jurisdiction? Are you required to use equipment and services provided by a state actor, including equipment or services that could result in a reduction in protections?</li><li>Have you entered into a patent or technology license agreement with a foreign entity or government that provides such entity with rights to improvements on the underlying technology and/or rights to continued use of the technology following the licensing term, including in connection with a joint venture?</li><li>Are you subject to a requirement that foreign parties must be controlling shareholders or hold a majority of shares in a joint venture in which you are involved, or are you involved in a joint venture that is subject to foreign ownership restrictions or requirements that a foreign party retain certain ownership rights?</li><li>Have you provided access to your technology or intellectual property to a state actor or regulator in connection with foreign regulatory or licensing procedures, including but not limited to local licensing and administrative procedures?</li><li>Have you been required to yield rights to technology or intellectual property as a condition to conducting business in or accessing markets located in a foreign jurisdiction?</li><li>Are you operating in foreign jurisdictions where the ability to enforce rights over intellectual property is limited as a statutory or practical matter?</li><li>Do you conduct business in a foreign jurisdiction or through a joint venture that may be subject to state secrecy or other laws, such as those limiting or prohibiting the export of data or financial documentation? Are you able to readily produce data or other information that is housed internationally in response to regulatory requirements or inquiries?</li><li>Have conditions in a foreign jurisdiction caused you to relocate or consider relocating your operations to a different host nation? Have you considered related material costs, such as costs to train new employees, establish new facilities and supply chains, and the impact of any related gaps or lags in production, manufacture and/or export of your products?</li><li>Do you have controls and procedures in place to adequately protect technology and intellectual property from potential compromise or theft? Do these policies and procedures enable you to identify risks and incidents, analyze the impact on your business, respond expediently, appropriately and effectively when incidents occur and repair any damage caused by such incidents? Are your controls and procedures designed to detect: <ul><li>Malfeasance by employees, contractors or other insiders who may have access to your technology and intellectual property;</li><li>Industrial, corporate or other espionage events;</li><li>Unauthorized intrusions into commercial computer networks; and</li><li>Other forms of theft and cyber-theft of your technology and intellectual property?</li></ul> </li></ul><ul><li>What level of risk oversight and management does the board of directors and executive officers have with regard to the company’s data, technology and intellectual property and how these assets may be impacted by operations in foreign jurisdictions where they may be subject to additional risks? What knowledge do these individuals have about these risks and what role do they have in responding if and when an issue arises?</li></ul>Next StepsWhile the Staff’s guidance is not a new rule, regulation or statement of the U.S. Securities and Exchange Commission, it does represent an important reminder for companies preparing disclosures for upcoming periodic reports and registration statements. While the potential risks for a company’s technology, data and intellectual property are often addressed in risk factor disclosures, companies with international operations should consider whether such disclosures need to be augmented to address the particular risks of theft or compromise that can arise because of the jurisdictions in which operations occur and relationships with foreign entities. We expect that the Staff will be focused on these disclosures in their review of periodic reports and registration statements.

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SEC Staff Issues Guidance on Technology, Data & IP Risks in International Operations

SEC Staff Issues Guidance on Technology, Data & IP Risks in International Operations

On December 19, 2019, the Staff of the U.S. Securities and Exchange Commission’s Division of Corporation Finance issued guidance outlining the Staff’s views abo

Nearly all companies—whether they’re focused on the B2C market or the B2B market—have embraced social media as a way to promote their goods and services and to interact with customers and potential customers. The growing use of social media has, however, created challenges for federal securities regulators who must enforce antifraud rules that were written prior to the digital age.Our Guide to Social Media and the Securities Laws summarizes how regulation has evolved in the face of the growing use of social media. It discusses the principal areas of focus for SEC-reporting companies, registered investment advisers, registered investment companies and registered broker-dealers that use social media.

Hot Off the Press: Our New Guide to Social Media and the Securities Laws

Nearly all companies—whether they’re focused on the B2C market or the B2B market—have embraced social media as a way to promote their goods and services and to 

Hot Off the Press: Our New Guide to Social Media and the Securities Laws

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 COMMUNICATIONSRule 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:<ul><li>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;</li><li>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</li><li>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.</li></ul>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 <a href="https://www.sec.gov/" target="_self">www.sec.gov. </a>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 COMMUNICATIONSThe 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).CONCLUSIONThe 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.

SEC Staff Guidance on the Use of Social Media in Securities Offerings, Tender Offers, Business Combinations and Proxy Contests

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

SEC Staff Guidance on the Use of Social Media in Securities Offerings, Tender Offers, Business Combinations and Proxy Contests

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The Guide to Social Media and the Securities Laws

Website Operators Await Final Guidance Regarding Compliance With California’s “Do-Not-Track” Disclosure Requirements

REGULATION FD Beginning in 1999 and continuing into 2000, media reports about selective disclosure of material nonpublic information by issuers raised concerns 

The Guide to Social Media and the Securities Laws

When the Securities and Exchange Commission lifted the ban on general solicitation and general advertising for private offerings of securities, can marketing blitzes on Twitter and other social media sites be far behind?It is not likely that we will see hedge funds aggressively touting investments on Twitter, or on bus shelters or milk cartons any time soon, because federal regulations will limit what issuers can say in these media.  Even then, hedge funds and other issuers will want to proceed cautiously, because they must comply with specific rules designed to prevent fraud.Lifting the ban on general solicitation.  For decades, start-ups, hedge funds and other companies seeking capital could only solicit investors in private offerings.  These issuers could only publicly offer their shares if they registered such shares with the SEC.  Further, commingled funds could only publicly offer their shares by registering with the SEC under the Investment Company Act.  In either case, registration involved significant capital, disclosure, reporting and operational restrictions that start-ups and hedge funds found prohibitive.The Jumpstart Our Business Startups Act (JOBS Act), which Congress enacted in April 2012,  ordered the SEC to relax the ban on general solicitation and general advertising in certain private offerings.  Among other things, this law required the SEC to adopt rules to allow issuers to make a general solicitation of investors, and to advertise, without registering with the SEC.On July 10, 2013, the SEC published regulations implementing the JOBS Act’s mandates to ease the ban on general solicitations.  While this development is welcome news to start-ups and small hedge funds that want new investors but can’t afford the costs of registering with the SEC, the rules come with some important catches.  Most notably, issuers relying on the new exemption can only sell shares to “accredited investors,” that is, investors that meet minimum annual income or net worth thresholds.  They must also file with the SEC “Form D,” which contains specific information about the issue and the issuer.General Advertising. The SEC proposed rules that would require issuers to disclose prominently certain warnings in “any written communication that constitutes a general solicitation or general advertising” of any offering that relies on the new exemption from registering shares with the SEC.  Social media entries and blogs fall squarely within this category, thus creating compliance challenges for issuers that want to find investors in social media.  For example, all issuers must disclose in all written communications and advertising that:<ul><li>the securities may be sold to “accredited investors;”</li><li>the securities are being offered in reliance on an exemption from the registration requirements of the federal securities laws and thus do not have to comply with those disclosure requirements;</li><li>the SEC has neither passed upon the merits nor approved the offering;</li><li>the securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and</li><li>the investment involves risk.</li></ul>To be sure, it will be difficult to cram these disclosures into a 140 character tweet.Private funds.  Private funds, such as hedge funds and private equity funds, must also disclose that the offering is not subject to the protections of the Investment Company Act, which regulates investments in mutual funds, ETFs and other registered pooled investment vehicles.  Further, private funds that want to mention performance would also be required to disclose, in any written communication, that, among other things:<ul><li>performance data represents past performance;</li><li>past performance does not guarantee future results;</li><li>current performance may be lower or higher than performance data presented;</li><li>the private fund is not required by law to follow any standard methodology when calculating and representing performance data;</li><li>the performance of the private fund may not be directly comparable to the performance of other funds; and</li><li>investors can call a phone number or visit a website for more current performance data.</li></ul>The SEC believes that private funds should be subject to the same rules for advertising and written communications that apply to mutual funds, whether or not the private funds rely on the exemption from registration.The SEC is watching.  The SEC will monitor general solicitations, general advertising and social media entries posted by issuers, including private funds.  This area is fertile ground for SEC enforcement proceedings.  Accordingly, you should proceed with cautiously when discussing private offerings, especially in social media, where cramming in all required disclaimers may be difficult.Federal securities regulators have published guidance for issuers, investment advisers, broker-dealers and investment companies that use social media. You can listen to our presentation about use of social media by investment advisers, broker-dealers and investment companies by clicking here.

Private Funds on Social Media—Proceed with Caution

When the Securities and Exchange Commission lifted the ban on general solicitation and general advertising for private offerings of securities, can marketing bl

Private Funds on Social Media—Proceed with Caution

FINRA, having enacted new communications rules that specifically reference electronic communications, having issued two Regulatory Notices (linked <a href="http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120779.pdf">here</a> and <a href="http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p124186.pdf">here</a>) providing guidance to the securities industry on social media, and having made social media and electronic communications exam priorities in two of the last three years, is now taking the next logical step:  conducting a sweep of broker-dealers to determine their compliance with the communications rules. In posting a Targeted Examination Letter—otherwise known as a sweep letter—on its website, FINRA invoked Rule 2210(c)(6), which provides for periodic spot checking by FINRA of firms’ written (including electronic) communications.FINRA’s sweep letter seeks, among other things:<ul><li>An explanation of how the firm is using social media at the corporate level in the conduct of its business;</li><li>An explanation of how the firm’s brokers generally use social media in conducting the firm’s business;</li><li>The firm’s written supervisory procedures concerning production, approval and distribution of social media communications; and</li><li>An explanation of how the firm monitors compliance with the firm’s social media policies.</li></ul>If past experience is any guide, FINRA likely will review the information with an eye to both establishing a baseline of current industry adherence to the communications rules and guidance, and to developing individual informal or formal disciplinary responses to firms whose procedures are seriously deficient. The sweep letter includes a request for information about the firm’s top 20 producing brokers who used social media to interact with retail investors. FINRA probably believes that, in view of these brokers’ levels of activity, examiners are more likely to find that some of these brokers failed in some way to comply with FINRA rules—such as FINRA content standards, or approval, review, recordkeeping and filing requirements—with respect to their use of social media to communicate with customers. FINRA might well seek to develop formal disciplinary actions against some of these brokers.As the firms that received this request gather responsive information, they should take a comprehensive look at their procedures for approval and review of communications using social media, and should determine whether these procedures are adequately documented, and whether their registered representatives, associated persons and compliance officers are adequately trained to apply these procedures. MoFo’s recent Guide to Social Media and the Securities Laws, and recent related presentation, are convenient places to start.

FINRA Issues Sweep Letter Regarding Use of Social Media

FINRA, having enacted new communications rules that specifically reference electronic communications, having issued two Regulatory Notices (linked here and here

FINRA Issues Sweep Letter Regarding Use of Social Media

Article courtesy of Morrison & Foerster’s MoFo TechAs financial institutions and investors turn to social media to instantly share snippets of news and potential clues about market trends, the FBI and SEC are monitoring such postings for evidence of insider trading and improper investment information. Companies must comply with pre-Internet federal securities laws covering antifraud, advertising, record keeping, and more, even though the use of Facebook and Twitter is far outpacing the development of federal regulations aimed at social media.Late last year, two FBI agents told Reuters that they see social media as a breeding ground for insider trading and securities fraud. “If there is any way to exploit it, these individuals will,” one agent said. The FBI also began a public search for an application that would scan social media for national security threats. “In trying to establish whether a trader who made significant gains in advance of market-moving news got nonpublic information from a company insider, the FBI might be interested in a list of the trader’s friends and contacts on social media sites,” says J. Alexander Lawrence, a Morrison & Foerster partner who works in securities law. “Evidence on Facebook, LinkedIn, or other sites could help the FBI connect the dots.”Government investigators have been pursuing insider traders with growing intensity, according to Morrison & Foerster’s 2012 Insider Trading Annual Review. One reason could be the relative lack of success in bringing cases related to the financial crisis. “While the SEC and DOJ have been criticized, fairly or not, for not bringing more cases arising from the financial crisis—especially against individuals—both agencies have received abundant praise for their crackdown on insider trading,” the report concluded.When communicating information through social media channels, companies have had to carefully consider whether material nonpublic information is being selectively disclosed in violation of Regulation FD. The SEC recently clarified its views regarding the applicability of Regulation FD to social media in a Report of Investigation which concluded that disclosure of material nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the social media site may be used for this purpose, is unlikely to qualify as an acceptable method of disclosure under the securities laws.However, the SEC indicated that companies using social media to communicate information could apply existing guidance on the use of corporate websites in determining if that information is adequately being disseminated through social media channels so that a company won’t run afoul of Regulation FD, which would include taking steps to notify the market that material information about the company can be gleaned from those social media channels.There are legal uncertainties about how far investigators can go in seeking information that is not publicly available on social media. Courts have ruled that certain messages sent on social media are protected under the Stored Communications Act, which limits the government’s power to force Internet service providers to disclose customer information. In addition, “friending” someone for the sole purpose of uncovering evidence may go against Facebook’s terms of service. States differ as to whether investigations led by attorneys can use deception, such as “friending” someone to uncover evidence, says Carl H. Loewenson Jr., a Morrison & Foerster partner and co-chair of the firm’s Securities Litigation, Enforcement, and White-Collar Defense Group. “If a prosecutor directs agents to do that, there is the risk of ethical violations resulting from engaging in misrepresentation under some state bar rules,” he says.

Stop Insider Tweeting!—Feds Eye Social Media for Securities Shenanigans

Article courtesy of Morrison & Foerster’s MoFo Tech As financial institutions and investors turn to social media to instantly share snippets of news and potenti

Stop Insider Tweeting!—Feds Eye Social Media for Securities Shenanigans

On April 2, 2013, the U.S. Securities and Exchange Commission (SEC) issued guidance in the form of the Report of Investigation under Section 21(a) of the Securities Exchange Act of 1934 which indicates that social media channels—such as Twitter and Facebook—could be used by public companies to disseminate material information, without running afoul of Regulation FD. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, Release No. 34-69729 (April 2, 2013) (the “21(a) Report”). The SEC emphasized that companies should apply the guidance from its 2008 interpretive release regarding the disclosure of material information on company websites when analyzing whether a social media channel is in fact a “recognized channel of distribution,” including the guidance that investors must be provided with appropriate notice of the specific channels that a company will use in order to disseminate material nonpublic information.The SEC confirmed in the 21(a) Report that Regulation FD applies to social media and other emerging means of communication used by public companies in the same way that it applies to company websites as discussed in the 2008 Guidance, which clarified that websites can serve as an effective means for disseminating information if investors have been made aware that they can locate the company information on the website.The 21(a) Report indicates that, while every situation must be evaluated on its own facts, disclosure of material nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the social media site may be used for this purpose, is unlikely to qualify as an acceptable method of disclosure under securities laws. In this regard, the SEC notes that it would not normally be assumed that the personal social media sites of public company employees would serve as channels through which the company discloses material nonpublic information.In analyzing the applicability of Regulation FD to any communications, the SEC notes that while the Regulation FD adopting release highlighted concerns about “selective” disclosure of information to favored analysts or investors, “the identification of the enumerated persons within Regulation FD is inclusive, and the prohibition does not turn on an intent or motive of favoritism.” The SEC also emphasizes that nothing in the Regulation FD would suggest that disclosure of material nonpublic information to a broader group that includes both enumerated and non-enumerated persons, but that still would not constitute a public disclosure, would somehow result in Regulation FD being inapplicable. Rather, the SEC states that “the rule makes clear that public disclosure of material nonpublic information must be made in a manner that conforms with Regulation FD whenever such information is disclosed to any group that includes one or more enumerated persons.” As a result, whenever a company makes a disclosure to an enumerated person, including to a broader group of recipients through a social media channel, the company must consider whether that disclosure implicates Regulation FD, including determining whether the disclosure includes material nonpublic information and whether the information was being disseminated in a manner “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” in the event that the issuer did not choose to file a Form 8-K.Drawing on the reference to “push” technologies (such as email alerts, RSS feeds and interactive communication tools, such as blogs) in the 2008 Guidance, the SEC acknowledged that social media channels are an extension of these concepts, and therefore the guidance should apply equally in the context of social media channels. Given the “direct and immediate communication” possible through social media channels, such as Facebook and Twitter, the SEC expects companies to examine whether such channels are recognized channels of distribution. In particular, the SEC emphasized the need to take steps to alert the market about which forms of communication a company intends to use for the dissemination of material nonpublic information. The SEC notes that without this sort of notice, the investing public would have to keep pace with a “changing and expanding universe of potential disclosure channels.” The ways in which such notice could be provided would include: (1) references in periodic reports and press releases on the corporate website and disclosures that the company routinely posts important information on that website and (2) disclosures on corporate websites identifying the specific social media channels a company intends to use for the dissemination of material nonpublic information (thereby giving people the opportunity to subscribe to, join, register for, or review that particular channel).In light of the SEC’s guidance, companies should consider whether to specifically address the use of social media in Regulation FD policies, including whether prohibitions, restrictions or editorial oversight should be implemented to govern the use of social media by those persons authorized to speak for the company. This will remain an evolving area that must be continually monitored, as the methods for interacting with shareholders, analysts and others continue to evolve. As with the 2008 Guidance, companies may not be in a position to implement the 21(a) Report’s guidance in such a way that they could do away with more traditional forms of public dissemination, but the guidance may provide more comfort for companies using social media to supplement other more traditional forms of communication. Companies should carefully evaluate what social media channels may be useful for communicating information, and begin providing notice that information about the company may be found on those social media channels, while using those channels as a regular source of information. At the same time, companies should advise individual officers, directors and employees that posting information about the company on social media channels could potentially implicate Regulation FD, and therefore such persons must exercise caution when communicating through social media.

SEC Offers Guidance on Use of Social Media for Public Disclosure

On April 2, 2013, the U.S. Securities and Exchange Commission (SEC) issued guidance in the form of the Report of Investigation under Section 21(a) of the Securi

SEC Offers Guidance on Use of Social Media for Public Disclosure

The <a href="http://www.reuters.com/article/2011/05/25/us-morganstanley-socialmedia-idUSTRE74O4NF20110525">announcement</a> by a Wall Street firm that it plans to give its financial advisers limited access to social media websites has been viewed by many as inevitable.  Morgan Stanley’s foray into the fast-changing world of social media highlights the difficulties faced by broker-dealers and investment advisers and the regulators who oversee them.  As more financial firms follow suit, regulators will struggle to enforce securities laws that were written when the telephone and the telegraph were the prevailing social media.Federal securities laws require broker-dealers and investment advisers to comply with a panoply of detailed rules designed to ensure that customers and clients are not misled.  The rules require them to keep records of every paragraph, sentence, and word—and now, every tweet.The challenge:  how can financial firms comply with these strict rules while satisfying the market’s growing passion for communicating by texts and tweets?  And how can regulators enforce two-dimensional securities laws in the new three-dimensional world?The exponential jump in social media usage has attracted the attention of federal securities regulators, who have responded with additional guidance and enforcement actions.The Financial Industry Regulatory Authority (FINRA), which regulates broker-dealers, published guidance on blogs and social networking websites in January 2010.  This was followed by guidance on social networking websites and business communications, posted in August 2011.In January 2012, the U.S. Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) published a National Examination Risk Alert called Investment Adviser Use of Social Media, which outlines in stark terms the SEC staff’s compliance concerns on the use of social media by registered investment advisers.While investors typically do not distinguish between broker-dealers, on one hand, and registered investment advisers, on the other hand, these two types of financial institutions are regulated under similar, but very different, sets of rules.  Social media use by investment advisers that are dually registered with the SEC and with FINRA is subject to both sets of rules and interpretations.Investment advisers.The SEC has recognized that social media is “landscape-shifting” and that its use by the financial services industry is rapidly accelerating.The SEC staff has stated its view that use of social media to communicate with clients and prospective clients may implicate Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended (Advisers Act), which governs advertisements by investment advisers.This rule, in relevant part, provides that an investment adviser will violate the Advisers Act’s anti-fraud provisions if it publishes, circulates, or distributes “any advertisement” that:<ul><li>Refers, directly or indirectly, to “testimonials of any kind concerning the investment adviser” or the investment advice it provides;</li><li>Refers, directly or indirectly, to past specific recommendations it provided (e.g., “cherry picking”), unless the adviser discloses a list of all recommendations, subject to certain requirements;</li><li>Represents that a graph, chart, or formula, by itself, can be used to determine which securities to buy, without prescribed disclosures;</li><li>Contains a statement to the effect that a report, analysis, or other service will be furnished free of charge, unless it is actually provided entirely free of charge without condition; or</li><li>Contains any untrue statement of a material fact, or that is otherwise false or misleading.</li></ul>The SEC defines “advertisement” very broadly.  “Advertisements” include, in relevant part, any notice, circular, letter, or other written communication addressed to more than one person, or any notice or announcement in any publication or by radio or television, that (1) offers analysis, report, or publication concerning securities, or that is to be used in making any determination as to when to buy or sell any security, or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or (3) any other investment advisory service with regard to securities.While this regulatory definition reflects technological advancements through and including the cathode ray tube television set, we can reasonably conclude that it applies to all kinds of social media communications, including blogs, wikis, photo and video sharing, podcasts, social networking, and virtual worlds.OCIE’s regulatory concerns can be categorized into three broad categories:  compliance policies and procedures, third-party content, and record keeping.Compliance programs.  First, the SEC staff is concerned that investment adviser compliance programs may include overlapping procedures that apply to advertisements and communications but do not specifically include social media.  The staff urges investment advisers to evaluate the effectiveness of their compliance programs with respect to the use of social media by the firms themselves, their representatives, or solicitors, including the following hot buttons:<ul><li>Usage guidelines.  Compliance procedures should address appropriate usage and restrictions on use of social media, based on potential risks.</li><li>Content standards. Content may implicate fiduciary duties or other regulatory issues, which compliance procedures should address.</li><li>Monitoring.  Advisers should consider how to monitor use of social media by employees, representatives, and solicitors, and should take into consideration the lack of ability to monitor third-party sites.</li><li>Frequency of monitoring.  The staff suggests a risk-based approach for frequency of monitoring of social media communications.</li><li>Approval of content.  Advisers should consider pre-approval of communications, rather than after-the-fact reviews.</li><li>Firm resources.  Advisers should evaluate their resources to ensure that they are sufficient to adequately monitor personnel and archive communications.</li><li>Criteria for approving participation.  Compliance procedures should assess risks to the adviser, including operational, reputational, privacy, and other regulatory issues.</li><li>Training.  Advisers should consider implementing a training program related to social media, with a view toward promoting compliance.</li><li>Certification. Consider procedures that require personnel to certify that they understand and will comply with social media policies.</li><li>Functionality. Advisers should consider the functionality of social media sites approved for use, including the continuing obligation to address any upgrades or modifications.</li><li>Personal/professional sites.  Advisers should consider whether to adopt policies to address business conducted on personal or third-party media sites.</li><li>Information security. Advisers should consider whether permitting representatives to have access to social media sites poses information security risks, and how to protect information.</li><li>Enterprise-wide sites.  Advisers that are part of a larger financial services or corporate enterprise may consider creation of usage guidelines designed to prevent the advertising practices of a firmwide social media site from violating the Advisers Act.</li></ul>Third-party content.   Second, the staff has indicated that third-party content on social media sites presents special compliance challenges.  These issues arise when third parties post messages, forward links, or post articles to an adviser’s website or in social media sites.  Adviser representatives and solicitors generally do not interact with these third parties or respond to their postings.The staff noted its concern about direct or indirect testimonials “of any kind.” The SEC’s rules do not define the term “testimonial,” but the SEC’s staff broadly interprets the term to include a statement of a client’s experience with, or endorsement of, an investment adviser.  Therefore, the use of “social plug-ins,” even when a third party hits the “Like” button on an adviser’s Facebook page could be a “testimonial” under the Advisers Act if the “Like” represents an explicit or implicit statement of a client’s experience with an investment adviser or its representative.The staff’s concerns underscore the challenges that investment advisers face when the use of freewheeling, interactive social media collides with requirements to comply with pre-Internet regulations that were designed to regulate newspaper and magazine advertisements.Recordkeeping.  The SEC’s third area of concern is recordkeeping obligations of advisers.  OCIE noted that the recordkeeping rules do not differentiate between traditional paper communications, like snail mail, and electronic communications, such as emails, instant messages, and other ways that investment advisers provide advisory services.  In other words, the federal regulators focus on the content of the communication, rather than its form.  OCIE urges investment advisers to ensure that their recordkeeping policies and procedures allow advisers that use social media to comply with the recordkeeping requirements.In January 2012, the SEC published an Investor Alert, Social Media and Investing: Avoiding Fraud, designed to make investors aware of fraudulent investment schemes that use social media.  It also provides tips for checking the backgrounds of investment advisers and brokers.  An Investor Bulletin, Social Media and Investing, Understanding Your Accounts provides tips for investors who use social media about privacy settings, security, and password selection.Also in January 2012, the Enforcement Division announced that the SEC charged an Illinois-based investment adviser with offering to sell fictitious securities on LinkedIn.  Among other things, the Division alleged that the adviser used LinkedIn discussions to promote fictitious “bank guarantees” and “medium term notes,” which generated interest from potential investors.  The adviser failed to comply with recordkeeping requirements or maintain a required Code of Ethics.The SEC’s Enforcement Division noted that fraudsters are quick to adapt to new technologies to exploit them for unlawful purposes.  This case suggests that the federal regulators are determined to adapt to new technologies to follow the fraud.Broker-dealers.As long ago as 1999, FINRA recognized the potential compliance issues posed by use of social media when it stated that a registered representative’s participation in an Internet chat room is subject to the same requirements as a presentation in person before a group of investors.  FINRA codified this guidance in 2003, when it defined the term “public appearance” to include participation in an interactive electronic forum.FINRA published its Guide to the Internet for Registered Representatives, and in September 2011, it released a three-part series of podcasts on these issues to educate broker-dealers and their representatives.FINRA is not so much concerned about the form of a communication from a registered representative; rather, it is concerned about the content of the communication and whether the registered representative obtained prior supervisory approval for sending the communication.  FINRA penalized a registered representative who posted 32 tweets touting a particular security without prior principal approval, among other alleged violations.For a summary of recent FINRA concerns about social networking, see our August 3, 2011 News Bulletin, FINRA to Issue More Guidance on Social Media.The Morgan Stanley initiative.  The New York Times DealBook reported on June 25, 2012 that, after a yearlong trial program, Morgan Stanley planned to give about 17,000 financial advisers “partial access” to Twitter and LinkedIn.  But don’t expect their registered representatives to get carried away with a flurry of on-the-fly stock picks.  The representatives draw posts “from a prewritten library” of Twitter messages and submit all LinkedIn postings for approval, using advanced software designed for this purpose.  Other firms likely will follow suit and devote more resources to developing this latest frontier of communications with customers.Not only did Morgan Stanley give the green light to its financial advisers to post limited tweets, but, on the firm’s official Twitter account, senior Morgan Stanley economists recently tweeted their analysis of the U.S. jobs report and the European Central Bank’s decision to lower interest rates.This initiative signals a trajectory and confirms that the financial services industry’s use of social media is here to stay.  And it is a somber reminder that, notwithstanding advances in communications technology, firms must still comply with pre-Internet federal securities laws covering anti-fraud, advertising, and record-keeping.Conclusion. The exponential growth of the use of social media presents compliance and operational challenges for investment advisers and broker-dealers.  Regulators are devoting more and more resources as they scramble to stay current with technological advances in this area.  Financial services firms are well advised to assess how their customers and employees use social media, to evaluate the potential risks, and to ensure that their policies and procedures adequately address the increasingly complex compliance and operational issues arising from the soaring popularity of social media.

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The Social Media Experiment: Challenges for Broker-Dealers and Investment Advisers

The Social Media Experiment: Challenges for Broker-Dealers and Investment Advisers