The SEC said it charged sports betting company DraftKings with selectively disclosing material nonpublic information to investors who followed the company CEO’s social media accounts without disclosing that same information to other investors. The regulator imposed a $200K fine.

Without admitting or denying the allegations, the company agreed to cease and desist from future violations of the charged provisions and to comply with undertakings, including relevant training for employees who have corporate communications responsibilities.

Selective disclosure of tradable information 

The sports betting company’s public relations firm on July 27, 2023 posted on the personal X account of Chief Executive Jason Robins that the company continued to see “really strong growth” in states where it was operating. The firm then posted a similar statement on Robins’ LinkedIn account, the SEC said.

The company failed to share its second-quarter financial results with all investors, even though the SEC’s Regulation Fair Disclosure (Reg FD – 17 CFR 243.100-243.103) required it to do so, according to the regulator. Nor had it publicly shared the information contained in the social media posts.  

The posts were taken down shortly after being published at the company’s request; however, DraftKings still failed to make the same information available to all investors until seven days later during its Q2 earnings announcement – seven days after the SEC prompted the company to disclose it.

Reg FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively

“Information about growth in sales as a public company can be extremely important to investors. It is essential that, when companies disseminate material, nonpublic information, they do so fairly to all investors,” said John Dugan, associate director for enforcement in the SEC’s Boston Regional Office.

Regulation FD and social media

Reg FD is an issuer disclosure rule that addresses selective disclosure providing that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), it must make public disclosure of that information. 

It applies to social media and other emerging means of communication used by public companies as well as to company websites and more traditional means of disseminating such information.

Specifically, the SEC issued guidance in 2008 clarifying that websites can serve as an effective means for disseminating information to investors if they’ve been made aware that’s where to look for it. And then in a 2013 Report of Investigation it clarified that company communications made through social media channels could constitute selective disclosures and, therefore, similarly require careful Regulation FD analysis.

“One set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information,” said George Canellos, Acting Director of the SEC’s Division of Enforcement. “Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don’t know that’s where they need to turn to get the latest news.”

Reg FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time, the SEC said in the 2013 report.

Enforcement in this area started with a Netflix CEO post

The SEC’s report of investigation stems from an inquiry the Division of Enforcement launched into a post by Netflix CEO Reed Hastings on his personal Facebook page in July 2012 stating that Netflix’s monthly online viewing had exceeded one billion hours for the first time. Netflix did not report this information to investors through a press release or Form 8-K filing, and a subsequent company press release later that day did not include this information.

At the time the SEC did not initiate an enforcement action or allege wrongdoing by Hastings or Netflix. Recognizing that there has been market uncertainty about the application of Reg FD to social media, the SEC issued the report of investigation to inform and clarify for the public its interpretation of the rule.