On September 26, 2024, the U.S. Securities and Exchange Commission (the “SEC”) charged DraftKings Inc. (“DraftKings” or the “Company”) with violations of Regulation FD resulting from disclosures made on social media. DraftKings is a digital sports entertainment and gaming company that provides users with online sports betting. The SEC charges¹ state that DraftKings selectively disclosed material nonpublic information (“MNPI”) before disclosing that same information to the public when posts on its Chief Executive Officer’s personal X (formerly Twitter) and LinkedIn accounts stated that the Company continued to see “really strong growth” in states where it was already operating. The Chief Executive Officer made the posts prior to the release of DraftKings’ second quarter 2023 financial results, and the posts were only available to investors who followed or otherwise viewed the Chief Executive Officer’s X account or LinkedIn account.

Violation of Regulation FD

Regulation FD prohibits public companies (including closed-end funds but excluding foreign private issuers) from selectively disclosing MNPI to certain securities professionals such as securities analysts, broker-dealers, investment advisers and institutional investors where it is reasonably foreseeable that they will trade on that information before the same information is made available to the general public. The SEC adopted Regulation FD in the year 2000 in response to concerns that public companies selectively disclosed MNPI, such as earnings results, to securities analysts or selected institutional investors. By requiring that companies disclose material information publicly first, Regulation FD aims to ensure that all investors have equal access to the company’s material disclosures at the same time. In the case of intentional selective disclosures, the company must release the material information simultaneously. In the case of unintentional selective disclosure, in order to avoid violating Regulation FD, the company must publicly disclose the material information promptly or shortly afterwards (usually no later than 24 hours after the unintentional disclosure). In order to satisfy Regulation FD, public companies must disclose the pertinent information in public SEC filings, such as Form 8-K or in other public forms of media, such as their corporate websites, or widely available forms of social media if the company has previously alerted the public that it would be using such alternative methods of public disclosure.

The SEC order found that DraftKings violated Regulation FD by disclosing MNPI to select investors who viewed the Chief Executive Officer’s X account or LinkedIn account. The SEC noted that these social media disclosures violated several of DraftKings’ internal policies. Regulation FD required DraftKings to disclose the information to all investors before, or promptly after, it disclosed it to these investors. However, DraftKings did not disclose the information to the public until seven days later when it announced its financial earnings for the second quarter of 2023. Consequently, the SEC found that DraftKings violated Regulation FD and Section 13(a) of the Securities Exchange Act of 1934.

Prior SEC Guidance on Regulation FD

In 2012, an SEC investigation of Netflix Inc. (“Netflix”) presented similar issues.² There the SEC issued a report noting that public companies may use widely followed forms of social media to announce information in compliance with Regulation FD as long as they inform the investors in advance that they will do so and indicate which social media platforms they intend to use to disseminate the information. The Netflix investigation arose from posts on the personal Facebook page of Netflix’s founder and Chief Executive Officer that Netflix’s “monthly viewing exceeded 1 billion hours for the first time”. In finding that Netflix had never released MNPI via Facebook previously and had not announced their intention to do so, the SEC took action. Additionally, Netflix did not disclose the information to investors by issuing a press release, filing a Form 8-K or posting on its website. The SEC concluded that this type of posting constituted selective disclosure of MNPI in violation of Regulation FD. The SEC specially stated in its report: “disclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to qualify as a method ‘reasonably designed to provide broad, non-exclusionary distribution of the information to the public’ [in compliance with Regulation FD]”.

These findings also echo guidance in the SEC’s seminal interpretive release from 2008 relating to the use of corporate websites as an alternative method of public disclosure to satisfy Regulation FD requirements, apart from only including the disclosure in a Form 8-K filing.³ That release addressed the then evolving methods of electronic communications and provided guidance on how to apply Regulation FD when using social media. In that release, the SEC noted the importance of making investors, the market and the media aware of the channels of distribution that the issuer expects to use in the future so that shareholders can anticipate such methods of receiving important corporate disclosures. The guidance, therefore, allowed for the possibility to use a corporate website as a way to disseminate information in satisfaction of Regulation FD, in lieu of only filing the disclosure on a Form 8-K. The SEC emphasized the principles set forth in the 2008 interpretive release in both the DraftKings and the Netflix actions.

Penalty

Without admitting or denying the SEC’s findings, DraftKings agreed to a cease-and-desist order from future violations of the provisions, to a civil monetary penalty in the amount of $200,000, and to comply with certain undertakings, including required Regulation FD training for employees who have corporate communications responsibilities.

Conclusion

The DraftKings order provides useful insights on how the SEC and its staff assess compliance with Regulation FD as it pertains to disclosure of MNPI on social media. While companies usually may use widely available forms of social media as an outlet to announce information in satisfaction of Regulation FD, they first must inform investors of the social media platform that they will be using to disseminate that information. Moreover, the SEC’s conclusions regarding DraftKings’ disclosure to the public seven days after the MNPI posts serve as a reminder that, if MNPI is accidentally selectively disclosed, the only acceptable cure is to promptly disclose to the public the same information. The SEC did not consider DraftKings’ delay of seven days to be sufficiently prompt to satisfy Regulation FD, which defines “promptly” for this purpose as no later than the later of 24 hours or the beginning of the next day’s trading on the New York Stock Exchange. While not technically subject to Regulation FD, we recommend that foreign private issuers also consider these requirements in connection with their investor relations and corporate disclosure practices.

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