Photo by Giandomenico Ricci

On September 12, 2012, Apple, Inc. held a highly anticipated conference at which it announced the upcoming release of the latest model of the iPhone. These types of conferences have been part of Apple’s standard operations for many years and seem to be a key element of its marketing strategy. Although attendance is limited to select persons, many Apple enthusiasts are able to keep up-to-date on an almost real-time basis by following any one of the numerous live blogs that usually cover the events. However, the manner in which these conferences are conducted, notably some of the information disclosed during the presentations, may inadvertently run afoul of Regulation FD

Regulation FD (Fair Disclosure) is an issuer disclosure rule that addresses selective disclosure. The regulation provides 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. The timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional; for an intentional selective disclosure, the issuer must make public disclosure simultaneously; for a non-intentional disclosure, the issuer must make public disclosure promptly. Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public. 

As mentioned above, Regulation FD applies to disclosures of “material nonpublic” information about the issuer or its securities. The regulation does not define the terms “material” and “nonpublic,” but relies on existing definitions of these terms established in the case law. Generally speaking, 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 nonpublic if it has not been disseminated in a manner making it available to investors generally. 

If you viewed the video of the conference posted on the Apple website, you may have noticed that, in addition to confirming the worst kept secret on the planet (i.e., that Apple would be commencing sales of a new version of the iPhone), Apple’s Chief Executive Officer Tim Cook presented information about sales of the New iPad and other of the company’s products. This was new information that had not been previously disseminated to the public in a press release or any SEC filing. Furthermore, it is likely that this information would be considered “material” because it showed the strength of Apple’s product sales as well as the extent of Apple’s current market share with respect to such products.  (Although I do note that the price of a share of Apple rose less than 0.5% on the day of the announcement, which may indicate that investors did not consider the sales data as material.)

I assume that some of the individuals invited to the conference were in fact Apple shareholders and further assume that it would be reasonable that such shareholders would trade in Apple securities on the basis of the information presented at the conference (in my view, this is not an unreasonable assumption to make). Therefore, because the circumstances of this conference would likely be classified as an “intentional disclosure,” assuming the sales information was material nonpublic information for Regulation FD purposes, Apple was obligated to give contemporaneous public disclosure of the material nonpublic information to the marketplace. However, this was arguably not done. The video of the conference was not made available to the public until after the conference ended, thereby delaying the disclosure of the material nonpublic information presented to those not in attendance. Apple seems to rely on the fact that information is being disseminated on a near real-time basis by the journalists and bloggers attending. However, it is not clear whether this method would be 100% effective for satisfying the Regulation FD disclosure obligations, particularly because most of the journalists focus on the new products and features rather than the financial information and results of operations mentioned. Thus, the bloggers may have missed or neglected to report some of the material nonpublic financial information discussed, thereby not providing adequate disclosure to the public marketplace. 

While it is arguable as to whether Apple’s conference actually violated Regulation FD, I would still recommend that in the future, to be safe, if Apple will be disclosing material nonpublic information it should either make a live video feed available to the public or, at the minimum, disseminate such information prior to the start of the conference (either by press release or on a Form 8-K). Because Apple seems to like to maintain a certain level of mystery around their events, the company would probably be more amenable to using a live video feed in the future instead of giving away all of the pertinent information beforehand. Of course, Apple could also assume the risk of a potential enforcement action (however unlikely) and continue do as they have done in the past. 

At this point, there is nothing that would indicate that the SEC would pursue Apple’s potential Regulation FD violation. Many commentators have alleged that the SEC has given Apple a “pass” on securities law compliance issues (e.g., the back dating of options granted to their founder and former CEO, Steve Jobs, as well as the arguably inadequate disclosure concerning his health). Even if the SEC did take action, it would probably not be earth-shattering from Apple’s perspective. While violations of Regulation FD can result in SEC enforcement actions (rarely) and civil monetary penalties, the regulation expressly takes such violations out of the scope of the anti-fraud provisions of the federal securities laws (e.g., Regulation FD violations are expressly not deemed to be violations of Rule 10b-5). Furthermore, there is no private right of action in cases of Regulation FD violations so investors must rely solely on the SEC for enforcement purposes.  Nevertheless, I will still likely be lined up outside of an Apple retail store tomorrow morning in hopes of getting my hands on the iPhone 5.