SEC Brings Regulation FD Enforcement Action Against DraftKings

Nonpublic Information Disclosed on CEO’s Social Media Accounts

On September 26, 2024, the SEC announced that it settled an enforcement action with sports betting company DraftKings, Inc. for violating Regulation Fair Disclosure (FD).[1]

DraftKings agreed to pay a $200,000 penalty because it failed to promptly disseminate material non-public information that a third-party public relations firm had posted on the DraftKings CEO’s social media accounts. Although the public relations firm was apparently authorized to post for the CEO, the SEC treated the disclosure as “non-intentional.”

Regulation FD requires public companies to promptly make public disclosure of any material information that is unintentionally disclosed to certain categories of persons, including to shareholders under circumstances where it is reasonably foreseeable that such shareholders will transact in the company’s securities on the basis of such information. The DraftKings enforcement action is interesting in that it presents a fact pattern involving the application of several key concepts in Regulation FD, namely, when a disclosure is “non-intentional,” what constitutes “public disclosure” of the information, and what it means to “promptly” make such public disclosure.

The SEC order alleges that DraftKings violated Regulation FD when the public relations firm published a post on the personal X and LinkedIn accounts of DraftKings’ CEO. These posts stated that the company continued to see “really strong growth” in the states in which it was operating. At the time of the posts, DraftKings had not yet publicly disclosed its second quarter 2023 financial results, and information regarding DraftKings’ revenue growth in existing states was material to investors. Further, the SEC order states that the CEO’s personal social media accounts had not been identified by DraftKings as a channel of communication to investors. As noted by the SEC in its 2013 Report of Investigation under Section 21(a),[2] personal social media sites of individuals employed by a public company would not ordinarily be assumed by investors to be channels through which a company would publicly disclose material corporate information, absent advance notice.

Additionally, even though DraftKings’ communications staff quickly instructed the public relations firm to remove the social media posts, the company failed to promptly make a public disclosure of the information contained in the posts (such as by issuing a press release or filing a Form 8-K to disclose the information). Instead, the information was not publicly disclosed by the company until nearly a week later when it publicly released its financial earnings for the quarter. As stated by the SEC in its order, this violates the Regulation FD requirement that companies must promptly disclose information to all investors after it was selectively disclosed to some.[3]

The SEC’s message here is twofold: (1) if companies wish to announce key information via social media accounts, whether the company’s own or those of their executives, such announcements will not meet the “public disclosure” requirement of Regulation FD unless the company has first adequately informed investors about which social media accounts will be used to disseminate such information and there is evidence that investors look to those accounts as a mechanism to obtain material information about the company; and (2) even in the case of a non-intentional disclosure to some investors, the company must promptly disclose the key information to all investors within the time period required by Regulation FD.

In light of the SEC’s focus on this area, companies may consider the following steps to ensure that its investors and the markets are aware of the channels of communications it intends to use to disseminate material company information:

• Evaluate which social media channels may be useful to communicate information to investors;
• Provide investors and other market participants opportunities to subscribe, follow, or join such channels;
• Alert investors and the markets of the use of such channels to disseminate material company information;
• Until there is evidence that investors use the relevant social media channel to obtain information about the company, consider also simultaneously releasing any material information in another Regulation FD-compliant manner; and
• Consider creating policies or procedures outlining the “rules of the road” if third parties are permitted to post information on behalf of the company and its personnel.