SEC Charges DraftKings with Regulation FD Violations for Disclosing Material Nonpublic Information in Social Media Posts

On September 26, 2024, the Securities and Exchange Commission (SEC) charged DraftKings Inc., with violations of Regulation Fair Disclosure (Regulation FD) in connection with the posting of material nonpublic information to certain social media accounts associated with the DraftKings CEO.¹

Regulation FD and SEC Guidance

Regulation FD prohibits public companies, or persons acting on their behalf, from selectively disclosing material nonpublic information to certain securities professionals or to shareholders who might trade on the basis of the information before such information has been disseminated to the general public. Regulation FD is designed to prevent selective disclosure of material nonpublic information to a “privileged few” and to provide individual investors with equal access to company information. A company that inadvertently discloses material nonpublic information in violation of Regulation FD may cure the violation by making prompt public disclosure of the information (typically within 24 hours).

Information is considered public for purposes of Regulation FD if it has been disseminated through a recognized channel of distribution that results in broad, non-exclusionary distribution to the public. Broadly disseminated press releases and Form 8-K filings are the accepted default channels for distributing material information to the public. In August 2008, in recognition of the growing reliance by companies, investors and other market participants on the Internet, the SEC issued an interpretive release concerning the public nature of information disclosed on company websites for purposes of Regulation FD (the 2008 Guidance).² The 2008 Guidance contained a list of non-exclusive factors for evaluating whether information disclosed on a company’s website could be considered disseminated through a recognized channel of distribution for purposes of Regulation FD. These non-exclusive factors include:

• whether and how a company has informed investors and the markets that it will post important information on its website;
• whether the company has a pattern or practice of posting important information on its website;
• whether the website efficiently leads investors and the markets to information about the company, including information specific to investors, and whether the information is prominently disclosed in a consistent location and in a format that is readily accessible to the general public;
• the extent to which information posted on the website is routinely picked up by the market and readily available to, and reported by, the media;
• steps the company has taken to make information posted on its website accessible or to alert the market of its availability;
• whether the website is kept current and accurate;
• whether the company uses other methods to distribute important information and the extent to which those other methods are the predominant method used by the company to disseminate information; and
• the nature of the information.

In 2013, the SEC released a Report of Investigation (the 2013 Report) in connection with its decision not to pursue an enforcement action against Netflix, Inc., or its Chief Executive Officer related to certain social media disclosures. In the report, the SEC clarified that the principles outlined in the 2008 Guidance apply equally to corporate disclosures made through social networking sites, such as Facebook, X (formerly Twitter), and LinkedIn.³ The 2013 Report expressly makes it clear that public companies who want to use a social media channel and not face challenges as to whether that media, on its own, satisfies Regulation FD, need to first take appropriate steps to establish the social media channel as a recognized channel of distribution including, in addition to the factors specified in the 2008 Guidance, alerting the market about:

• the forms of social media or other communication channels the company will use to disclose material nonpublic information; and
• the type of information the company intends to disclose through these identified communication channels.

The DraftKings Conduct

According to the SEC order, on July 27, 2023, a week before DraftKings was scheduled to announce its financial results for the quarter ended June 30, 2023, a DraftKings public relations firm posted material nonpublic information on the DraftKings CEO’s personal X and LinkedIn accounts, neither of which had been publicly identified by DraftKings as a Regulation FD-compliant distribution channel. The information included statements about the company’s growth in its existing markets, which “was not generally known or available to the public” at the time of the posting.

The postings also violated DraftKings’ Social Media Policy and Regulation FD Policy, which prohibited use of social media networks to disclose confidential or material nonpublic information, as well as the “quiet period” provisions in the DraftKings Regulation FD Policy, which prohibited disclosure or discussion of DraftKings’ financial results or performance during the period prior to an earnings release.

The DraftKings communications team recognized the error and took the posts down after half an hour. However, DraftKings did not take any steps to promptly disclose the inadvertently disseminated information to the general public, instead waiting until its previously scheduled earnings release a full week later to disclose the information.

DraftKings agreed to pay a US$200,000 civil penalty to settle the charges.

Conclusion

The charges brought by the SEC highlight some important best practices for companies.

• Clearly Identify and Communicate Recognized Channels of Distribution. Companies should clearly identify their recognized channels of distribution for disclosure of material nonpublic information, taking into account the factors contained in the SEC’s 2008 Guidance and 2013 Report, and communicate these channels to any third-party service providers engaged to produce website and social media content on its behalf.
• Consider Unique Risks of Using Social Media Channels for Disseminating Material Nonpublic Information. Social media channels are an attractive way for companies to build brand awareness and customer engagement, but companies should exercise caution when using these channels to share material nonpublic information. Companies continue to take varied approaches in light of the SEC’s 2008 Guidance and 2013 Report, from prohibiting all disclosures of material nonpublic information on social media platforms to requiring advance approval prior to any such disclosure and often only by the company’s authorized spokespersons. Company social media policies and procedures should be carefully drafted to ensure that proper controls are in place for ongoing compliance with Regulation FD. Additionally, companies should regularly review their ongoing practices with respect to website and social media channels to ensure that any previously identified channels of distribution remain Regulation FD-compliant.
• Overlap Between Regulation FD and “Quiet Period” Policies. “Quiet period” policies (often included in a company’s Regulation FD policy) apply to all forms of communication, but only during the sensitive period before quarterly financial results are publicly released. While “quiet period” policies are designed to prevent violations of Regulation FD, they would not necessarily prohibit the public release of material information done in a Regulation FD-compliant manner.
• Inadvertent Disclosures of Material Nonpublic Information May Only Be Cured Through Public Dissemination of Inadvertently Disclosed Information. It is not sufficient for a company to simply take down or otherwise remove the selectively disclosed information from the company’s website, social media sites or other locations. Additionally, an inadvertent disclosure may still constitute a violation of Regulation FD even if the selective disclosure is made for just a brief period of time (in this case, 30 minutes).
• Ongoing Regulation FD Training is Key to Compliance. Companies should take steps to periodically remind senior officers and other employees, as well as relevant third-party service providers (e.g., a public or investor relations firm), about the requirements of those policies and related disclosure restrictions imposed by the federal securities laws.

¹ DraftKings, Exchange Act Release No. 101,198 (Sept. 26, 2024), https://www.sec.gov/files/litigation/admin/2024/34-101198.pdf.

² Commission Guidance on the Use of Company Web Sites, Exchange Act Release No. 58,288, Investment Company Act Release No. 28,351 (Aug. 7, 2008), https://www.sec.gov/files/rules/interp/2008/34-58288.pdf. 

³ Report of Investigation Pursuant to Section 21(a) of the Exchange Act: Netflix, Inc., and Reed Hastings, Exchange Act Release No. 69,279 (Apr. 2, 2013), https://www.sec.gov/files/litigation/investreport/34-69279.pdf. 

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