On April 2, 2013, the Securities and Exchange Commission issued new guidance that would permit companies to use social media such as Facebook and Twitter to disclose material information provided that investors are first alerted to the social media sites that will be used.
The guidance was published in a Report of Investigation (a copy of the Report can be found here) stating that the SEC would not institute an enforcement action against Netflix, Inc. following an investigation concerning whether Netflix and its Chief Executive Officer, Reed Hastings, violated Regulation FD. The investigation stemmed from Hastings's July 3, 2012 post on his personal Facebook page that Netflix had streamed one billion hours of content in the month of June. Prior to making the post, neither Hastings nor Netflix alerted investors that the company might use the CEO’s personal Facebook page to disclose material, non-public information. The Report states that providing such advance notice is essential for public companies seeking to comply with Regulation FD. Regulation FD
Regulation FD proscribes the selective disclosure of material, non-public information to security market professionals and shareholders where it is reasonably foreseeable that shareholders will trade on the basis of such information. If the disclosure is intentional, a company must make a simultaneous public disclosure of the information. If the disclosure is inadvertent, public disclosure must be made promptly afterward.
In light of uncertainty regarding the applicability of Regulation FD to companies’ increased use of social media to communicate with investors and the market at large, the SEC took the opportunity to provide important guidance in the Report. The SEC states clearly that issuer communications through social media require careful Regulation FD analysis comparable to communications through more traditional channels and companies who want to use social media to disclose material information should follow the guidelines provided in the SEC’s August 2008 Guidance on the Use of Company Websites (a copy of the 2008 Guidance can be found here).
Applying the 2008 Guidance to Social Media Use
While the 2008 Guidance was issued before the recent social media boom and was focused primarily on websites, the SEC advises that the principles of the 2008 Guidance can be applied to a company's use of social media. The 2008 Guidance provides companies with a factor-based framework for analysis of whether information disclosed through a company's website is considered publicly disclosed (i.e., through
a method that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public).
To meet this criterion, a company must demonstrate the following:
- its website is a “recognized channel of distribution”;
- posting information on its website is effective in disseminating information; and
- a “reasonable” period has elapsed between posting the material to its website and disseminating the information posted to persons in the proscribed categories.
Recognized Channel of Distribution & Notice
The Report emphasizes that a disclosure platform used by a company must constitute a recognized channel of distribution and particularly whether the company has made the market aware of the channels of distribution it expects to use, so investors know where to look for disclosures of material information about the company. In other words, companies should provide advance notice to investors that they intend to use a particular social media site to disseminate material, non-public information. To comply with Regulation FD, companies should use SEC filings, company website postings and press releases to advise investors of this intention well in advance of relying on social media as a means of such dissemination.
In addition, a company should also consider the following factors in determining whether its social media site is a “recognized channel of distribution”:
- whether the company has made investors and the markets aware that it will post material information on its social media site and whether it has a pattern or practice of posting such information on its site; and
- the extent to which information posted on the company’s social media site is regularly picked up by the market and reported in the media, or the extent to which the company has advised newswires or the media about such information and the size and market following of the company involved.
Compliance with Regulation FD will continue to be based on the specific facts and circumstances surrounding a company’s use of a particular disclosure platform. The SEC's guidance recognizes that given the evolution of technology, disclosing material, non-public information through social media may be an acceptable method of complying with Regulation FD provided that the company first alerts investors to the possibility that such information may be disseminated through a particular social media site in order to satisfy Regulation FD's requirement to use a method reasonably designed to provide broad, non-exclusionary distribution of the information to the public.
Companies seeking to use social media as a means of disclosure should also consider the informality and fast-paced nature of social media portals and liabilities associated with inaccurate disclosure. These companies should ensure that processes are in place to review content before it is posted to a company's social media site. Notwithstanding its informality, disclosures through social media should be treated with the same care and review as disclosures through more traditional means. In addition, companies should also consider the vulnerability of social media sites to cyber attacks or misuse by unauthorized persons when deciding whether to make it a recognized channel of distribution.