The first stop in our tour of press releases, public companies and blogs is an important one, as it’s a decision that affects the management of public companies on a daily basis: deciding what information needs to be shared with the public and what does not.

As far as the SEC is concerned, that decision hinges on whether the information in question is both material and nonpublic. Before I continue, I should probably make sure you understand that I am not a lawyer, and am not offering legal advice here. Hell, I’m not even an investor relations professional, although I’ve done PR for many a public company. So take all this with a grain of salt–my intent is to inform and encourage the discussion of this topic on the blogosphere.

Okay, to begin, Regulation FD, passed in 2000, focuses on preventing the “selective disclosure” of “material nonpublic” information to those persons who would “reasonably be expected to trade securities on the basis of the information or provide others with advice about securities trading,” according to John D. Hogoboom, Steven M. Skolnick and Michael W. Valente, who wrote a corporate finance alert on RegFD in September, 2000.

The authors provide a good overview of the concepts of selective disclosure” and material nonpublic information. They write:

Selective Disclosure
“Selective disclosure” occurs when an issuer voluntarily discloses material non-public information to a limited number of persons – typically analysts or other securities market professionals – prior to the release of such information to the general public. Selective disclosure is viewed by many investors as being indistinguishable from illegal “tipping.” However, because of quirks in the development of insider trading law, the legality of selective disclosure has been unclear. Regulation FD is designed to address the most egregious instances of selective disclosure by requiring public companies to effect a broad general dissemination of material information that is disclosed to certain market professionals or to promptly publicize material information that has been selectively disclosed to such persons inadvertently.

Material Nonpublic Information
Regulation FD applies to the disclosure of “material non-public” information. Under existing case law, information is material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision. To fulfill the materiality requirement, there must be a substantial likelihood that a fact “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Information is “non-public” if it has not been disseminated in a manner making it available to investors generally.

To give public companies additional guidance to help decide what information is public,

the SEC included in the release discussing the adoption of Regulation FD the following non-exclusive list of information and events that are likely to be material:

Okay, now we have some very rough criteria for throwing as-yet nonpublic information into either a material or immaterial bucket.

One important thing to note is the scope of RegFD, which I touched on earlier. The corporate finance alert expounds on this (emphasis mine):

[RegFD] does not cover discussions with the media, promotional activities and other non-market communications, although such communications were initially proposed to be covered by the regulation.

This doesn’t mean we’re off the hook, because we’re media people. As the authors explain:

[G]iven the SEC’s hostility toward selective disclosure, the policies underlying Regulation FD, and the likely effects of the regulation on corporate communications policies generally, we believe that any selective disclosure of material non-public information, regardless of the context, will become an increasingly likely source of potential liability for public companies. Accordingly, we believe that public companies will have to take steps to avoid all selective disclosures, regardless of whether they are subject to the requirements of Regulation FD. For example, issuers that have not already done so should appoint spokespersons to whom market inquiries are directed and such persons should be educated regarding the pitfalls of selective disclosure and the requirements of Regulation FD.

Going forward, I’m going to organize my thoughts along the material/immaterial distinction as best I can. Our next stop: disclosing material nonpublic information.

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