On April 2, 2013, the Securities and Exchange Commission (the "SEC") issued a report of investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934 providing guidance to public companies on the application of Regulation FD to corporate disclosures made through social media (the "Report").[1] The Report clarifies that guidelines issued by the SEC in 2008 regarding disclosures on corporate websites apply to public companies' use of social media to disseminate material, nonpublic information. While many companies already use social media on a regular basis to promote their business and communicate with customers, we expect that the conditions to satisfying the SEC's guidance and other considerations will, at least in the near term, result in most companies using social media channels to supplement, rather than replace, traditional methods for disclosure of material, nonpublic information, just as companies have done in response to the SEC's prior guidance regarding disclosures on corporate websites. Nevertheless, the Report serves as an important reminder of the need to consider securities law implications of evolving communication channels and for companies to evaluate the effectiveness of their disclosure controls and procedures in the context of social media disclosures.

Regulation FD Background

The SEC adopted Regulation FD in 2000 to prevent selective disclosure of material information by public companies to those who would reasonably be expected to trade securities on the basis of the information or provide others with advice about securities trading. Regulation FD requires that material, nonpublic information be publicly disclosed on Form 8-K or an alternative method of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.[2] The SEC has stated that Regulation FD "does not require use of a particular method, or establish a ‘one size fits all' standard for disclosure."[3]

In 2008, the SEC issued Guidance on the Use of Company Websites (the "2008 Guidance")[4] to clarify that company websites can, in certain circumstances, serve as an effective means for disseminating material information to investors consistent with Regulation FD. In the 2008 Guidance, the SEC stated, "in evaluating whether information is public for purposes of our guidance, companies must consider whether and when: (1) a company web site is a recognized channel of distribution, (2) posting of information on a company web site disseminates the information in a manner making it available to the securities marketplace in general, and (3) there has been a reasonable waiting period for investors and the market to react to the posted information."[5] The 2008 Guidance did not, however, expressly apply to social media. Moreover, despite the 2008 Guidance, relatively few companies today use corporate websites to satisfy their Regulation FD obligations. Instead, most public companies still file a Form 8-K and/or issue a press release, and many then post the same information, or links to the information, on their corporate websites. Some companies in addition post the information to their Facebook page, Twitter account and other social media channels.

The Netflix Investigation

The Report follows an inquiry by the SEC's Division of Enforcement regarding a July 2012 post by Netflix Chief Executive Officer Reed Hastings on his personal Facebook page stating that Netflix's monthly online viewing had exceeded one billion hours for the first time, which represented a nearly 50% increase in hours from what Netflix had announced six months earlier.[6] Netflix's stock price had begun rising before Mr. Hastings' post and increased from $70.45 at the time of the post to $81.72 at the close of the following trading day. The Report indicates that Netflix did not disclose this information to investors through a press release or Form 8-K filing, and Mr. Hastings and Netflix had not previously used Mr. Hastings' Facebook page to announce company metrics. Rather, Netflix consistently had directed the public to its own Facebook page, Twitter feed, blog and company website for information about Netflix. In December 2012, Mr. Hastings also stated that Netflix does not "currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings."

The Report notes that there has been uncertainty concerning how Regulation FD and the 2008 Guidance apply to disclosures made through social media channels. It also indicates that the SEC will not initiate an enforcement action against Mr. Hastings or Netflix.

Applicability of the SEC's 2008 Guidance on Company Websites to Social Media

The Report states the SEC's view that company communications made through social media should be examined for compliance with Regulation FD. This includes determining (1) whether a disclosure using social media is to specific individuals covered by Regulation FD (e.g., securityholders and securities professionals), (2) whether the disclosure includes material, nonpublic information, and (3) if not otherwise distributing the information in compliance with Regulation FD, whether disseminating the information via the social media channel is "reasonably designed to provide broad, non-exclusionary distribution of the information to the public."[7]

In assessing the third prong, the Report states that "[t]he central focus of this inquiry is whether the company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information."[8] The Report then explains that the 2008 Guidance provides a relevant framework for applying Regulation FD to social media channels of distribution.

The 2008 Guidance provides a non-exhaustive list of factors to consider in evaluating whether a company's posting of information on its website constitutes the use of a "recognized channel of distribution" and whether the information has been made accessible to the securities marketplace, such that the information posted is public for purposes of Regulation FD. These factors, which we have revised to address social media channels, include:

  • whether and how the company has let investors and the markets know that the company uses the particular social media channel;
  • whether the company has made investors and the markets aware that it will disseminate important information through the particular social media channel and whether it has a pattern or practice of doing so;
  • whether the company's use of the social media channel leads investors and the market efficiently to information about the company, including information specifically addressed to investors, whether the information is prominently disclosed, and whether the information is presented in a format readily accessible to the general public;
  • the extent to which information released through the social media channel is regularly picked up by the market and readily available media;
  • the steps the company has taken to make the social media channel and the information contained therein accessible, including the use of "push" technology or other distribution methods;
  • whether the company keeps the social media channel current and accurate;
  • whether the company uses other methods to disseminate the information and whether and to what extent those other methods are the predominant methods the company uses to disseminate information; and
  • the nature of the information posted on the social media channel.[9]

The Report reiterates that public disclosures of material, nonpublic information, even if not directed to stock analysts or other "covered persons"[10] under Regulation FD, must be made in a manner that conforms with Regulation FD whenever such information is disclosed to any group that includes one or more covered persons. The Report also states that, while every case must be evaluated on its own particular facts, the disclosure of material, nonpublic information on the personal social media site of an individual corporate officer--without advance notice to investors that the social media site may be used for such purpose--is generally unlikely to qualify as a method "reasonably designed to provide broad, non-exclusionary distribution of the information to the public" within the meaning of Regulation FD. Without adequate advance notice, some investors may not have the opportunity to access the information at the same time as other investors.[11]

What Companies Should Do Now

The concept of using social media for disclosure purposes is an evolving issue that companies should continue to monitor as communications practices emerge. While the Report confirms that social media can be used in a manner that satisfies Regulation FD, even when persons must enroll with a third-party service to have access, it is also clear that there are hurdles to doing so. As with company websites, social media cannot instantly be deployed as an FD-sufficient means of dissemination for material, nonpublic information. Companies wishing to use social media to communicate market-sensitive information must take steps to satisfy the SEC's 2008 Guidance and the standards referenced in the Report, and determining whether a particular social media channel constitutes a "recognized channel of distribution" will remain a facts-and-circumstances analysis.

The Report does have broader implications for public companies. Set forth below are several steps that a public company should take now in light of the Report.

  1. View the Report as a catalyst for reassessing which disclosure methods are most appropriate for the company. Most companies are likely to continue to use Forms 8-K and/or press releases as the primary disclosure channel. Even though the SEC has now expressly stated that companies can use social media to disseminate material, nonpublic information to investors consistent with Regulation FD, companies need to carefully consider whether to begin the process towards relying on social media in this regard. For example, doing so will require:
    • consideration of other securities law disclosure implications--for example, there is an exception to the requirement to file an Item 2.02 Form 8-K for information that is complementary to, and is made shortly after, an earlier disclosure of earnings information that is available only if the earlier information was promptly included on a Form 8-K. Recordkeeping and document retention requirements may also pose additional challenges in the social media context.
    • examination of other company-specific regulatory requirements that may apply to the company's use of social media to disseminate material, nonpublic information, such as the January 2013 proposed guidance by the Office of the Comptroller of the Currency and other banking regulators addressing the applicability of consumer protection and compliance laws, regulations and policies to the social media context.[12]
    • additional resources (e.g., personnel dedicated to "translating" traditional communications like press releases into social media communications).
  2. For a company that decides to begin the process towards establishing specific social media channels as a "recognized channel of distribution," consider the factors from the 2008 Guidance in the social media context (as described above) to determine whether a practice of disclosure through a particular social media channel such as Facebook or Twitter would be appropriate. While the question of whether a company's use of social media qualifies as a "recognized channel of distribution" would require a careful facts-and-circumstances analysis, a company can take various actions to lay the right groundwork. As suggested by the 2008 Guidance factors, these actions include:
    • notifying investors and the markets (through SEC filings, press releases and the company's website) that the company plans in the future to disseminate material, nonpublic information through a particular social media channel and provide the Internet address for investors to access that channel;
    • establishing a pattern of regularly disclosing such information via that social media channel whenever disclosure is warranted in addition to ongoing disclosures on Form 8-K and/or through press releases;
    • using the social media channel in a way that leads investors and the market efficiently to information about the company, such as by making disclosures prominent and presenting the information in an easy-to-understand format;
    • presenting and maintaining information that is current and accurate;
    • monitoring the social media channel to verify that communications are being viewed by investors, such as by monitoring the number of followers; and
    • considering ways to "push" disclosure affirmatively via the social media channel.
  3. Reexamine the company's disclosure controls and procedures to confirm that they apply to any release of company information on social media channels--personal and corporate--even if those channels are not the sole method for the company's dissemination of such information.
  4. Review and update the company's Regulation FD policy to make it consistent with the company's disclosure controls and procedures and to take into account the company's approach to the use of social media. Re-evaluate which officers, employees and agents are authorized to regularly communicate with any covered persons under Regulation FD (including the company's securityholders) and whose statements are thus subject to Regulation FD, and provide those persons with updated training on Regulation FD that specifically addresses use of both company-sponsored and personal social media. Companies also should consider addressing social media communications in their Regulation FD policy.
  5. Enact or update social media guidelines or policies for officers and key employees, particularly those who have access to material, nonpublic information, and implement training programs for officers and key employees regarding the application of the securities laws to information disseminated through social media, the overlap between personal and professional online presences, and the multiplying effect of social media on reputational risk.