SEC Charges DraftKings with Selectively Disclosing Nonpublic Information Via CEO’s Social Media Accounts

The Securities and Exchange Commission (SEC) recently charged DraftKings Inc. with a significant violation of Regulation Fair Disclosure (FD) for selectively sharing nonpublic information. The violation occurred when material information was disclosed via social media platforms, resulting in a $200,000 civil penalty. This article delves into the SEC charges against DraftKings, the specifics of the violation, and the importance of fair dissemination of information to investors.

What Led to the SEC Charges Against DraftKings?

On July 27, 2023, DraftKings’ public relations team posted a significant update about the company’s performance on the personal X (formerly Twitter) and LinkedIn accounts of DraftKings’ CEO. The post declared that DraftKings continued to experience “really strong growth” in the states where it operated. However, at the time, DraftKings had yet to publicly release its second quarter 2023 financial results, which contained this crucial growth information. This premature disclosure is at the heart of the Regulation FD violation.

Why Was the Disclosure Problematic?

The problem arose because the information shared on the CEO’s social media accounts wasn’t disclosed to all investors. In other words, only those who followed the CEO’s social media accounts had access to the growth data, while other investors remained in the dark. Under Regulation FD, publicly traded companies like DraftKings are required to disclose any material information equally to all investors. Failing to do so puts some investors at an unfair advantage, which is exactly what the SEC sought to address.

What is Regulation Fair Disclosure (FD)?

Regulation FD was established by the SEC to ensure that companies provide material information to all investors simultaneously, preventing selective disclosure. This regulation promotes transparency and equal access to information, ensuring that no investor group is favored over another. When a company like DraftKings discloses material information on a selective basis, it undermines market fairness, leaving some investors in a position of disadvantage.

The Timeline of the Disclosure Violation

DraftKings made the problematic social media posts on July 27, 2023, at 5:52 p.m. While the posts were soon removed at the company’s request, the damage had already been done. According to the SEC’s order, DraftKings should have promptly disclosed the same information to all investors, but instead, the public only gained access to this critical information seven days later when the company released its second-quarter earnings.

Why Fair Disclosure is Essential for Public Companies

The SEC’s John Dugan, Associate Director for Enforcement in the Boston Regional Office, emphasized the importance of fair information dissemination. As he noted, growth in sales and other performance indicators are vital to investors, especially for publicly traded companies like DraftKings. When companies share such material information, it must be done in a manner that is accessible to all investors, ensuring that no one group has an unfair advantage in the market.

The Impact on Investors

Selective disclosure, like that seen in this case, can significantly impact investors. Those who are privy to material, nonpublic information can make investment decisions based on data that others don’t have access to, leading to an imbalance in the market. For instance, investors who saw the CEO’s posts on X and LinkedIn may have had an advantage over others by knowing about the company’s continued growth before the official earnings report was released.

SEC Charges and Penalty Against DraftKings

The SEC’s order charged DraftKings with violations of Section 13(a) of the Exchange Act and Regulation FD. Without admitting or denying the findings, DraftKings agreed to cease and desist from future violations of these provisions. Additionally, the company agreed to pay a $200,000 civil penalty and implement a Regulation FD training program for employees responsible for corporate communications.

DraftKings’ Commitment to Compliance

As part of the settlement, DraftKings committed to taking measures to prevent future violations. These measures include requiring specific Regulation FD training for employees involved in corporate communications to ensure they understand the rules regarding material, nonpublic information. This training aims to enhance the company’s compliance and prevent selective disclosure from happening again in the future.

Lessons from the DraftKings Violation

This case serves as a clear reminder of the importance of proper information dissemination by publicly traded companies. In the fast-paced world of social media and online communication, companies must be especially careful to ensure that all investors receive material information equally and at the same time.

The Role of Social Media in Investor Relations

Social media has become an increasingly important tool for corporate communication, but it also presents new challenges. As this case highlights, companies need to be mindful of how they share material information across different platforms to avoid selective disclosure. Careful monitoring of corporate accounts, especially those of key executives, is crucial to ensuring that information remains compliant with SEC regulations.

By taking these steps, companies like DraftKings can ensure that they remain transparent, fair, and in compliance with the rules designed to protect investors.

SEC Press Release

Representing Advisors and Investors, Nationwide.