SEC URGES ADDITIONAL RISK DISCLOSURES FOR “MEME STOCKS”

In the wake of the Game Stop trading frenzy fueled by a social media meme, the SEC has posted new guidance for companies facing unusual periods of extreme price volatility in their securities, such as so-called “meme stocks.” 

The guidance, posted on Monday, February 8, essentially asks companies to put potential investors on notice that a rapid increase in the price of their stock is unjustified—that nothing has changed about their business or industry that would warrant such a frenzy. The notice was recommended for any company undergoing a period of “extreme price volatility.” That is, a period with sudden and unusual “stock run-ups or recent divergences in valuation ratios relative to those seen during traditional markets, high short interest or reported short squeezes, and reports of strong and atypical retail investor interest (whether on social media or otherwise).”

Though not mandatory, the SEC suggests companies facing such unusual periods of volatility should provide additional disclosures specifically tailored to the unique circumstances surrounding the volatility. In a sample letter posted with the guidance, the SEC urged that companies describe the recent volatility and disclose any known risks of investing under the circumstances. The letter also suggests that companies disclose the market price of the stock prior to the recent “extreme price volatility” period, as well as any recent changes in the company’s financial condition that are consistent or inconsistent with the stock price changes.

In other words, if a surge in a company’s stock is caused by a social media campaign to manipulate the stock price, the SEC recommends that the company warn investors.