The Securities and Exchange Commission recently issued an investigative report1 confirming that public companies may use social media, such as Facebook, Twitter and corporate blogs, to announce material non-public information in compliance with Regulation FD – as long as investors and the market have been alerted in advance about the specific channels that will be used to disseminate the information. In light of this new guidance, public companies should review their corporate communications policy, consider whether they want to implement social media disclosure, and if so, take appropriate steps to ensure compliance with Regulation FD and other securities laws and regulations.
The Report resulted from an inquiry by the SEC’s Division of Enforcement into a post by Reed Hastings, Netflix’s CEO, on his personal Facebook page stating that Netflix’s monthly online viewing had exceeded one billion hours for the first time. According to the SEC, "neither Mr. Hastings nor Netflix had previously used Hastings’ personal Facebook page to announce company metrics, and Netflix had not previously informed shareholders that Hastings’ Facebook page would be used to disclosure information about Netflix." The company did not issue a press release, post the information on its website or file a Form 8-K. The SEC decided not to pursue an enforcement action against Netflix or Mr. Hastings, acknowledging that, during its investigation, it learned that "there is uncertainty concerning how Regulation FD and the Commission’s 2008 Guidance (described below) applies to disclosures made through social media channels."
Regulation FD, which was promulgated by the SEC in 2000, prohibits public companies from selectively disclosing material non-public information to certain securities professionals or shareholders if it is reasonably foreseeable that they will trade on the information before it becomes publicly available, and requires disclosure of material non-public information in a manner reasonably designed to distribute it to the general public broadly and non-exclusively. In practice, this public disclosure requirement is often satisfied by issuing a press release and filing a Form 8-K with the SEC.
In August 2008, in response to increasing use of company websites to disseminate information to investors and the market, the SEC issued guidance regarding the use of company websites.2 In the 2008 Guidance, the SEC suggested that the use of company websites might satisfy the public disclosure requirement under Regulation FD without the issuance of a press release depending on whether (1) the website is a "recognized channel of distribution", (2) posting information on the website disseminates information in a manner that makes the information available to the securities market in general, and (3) there has been a reasonable waiting period for investors and the market to react to the posted information. Whether a company’s website is a "recognized channel of distribution" depends in part on what steps the company has taken to alert the market to its website and its disclosure practices. It also depends on the extent to which the website is used by investors and the market.
Report of Investigation
In the Report, the SEC stated that the principles outlined in the 2008 Guidance apply to corporate disclosure made through social media channels. The SEC emphasized, however, that communications through social media channels require the same careful Regulation FD analysis as more traditional communications and that the investing public must be alerted in advance to the channels of distribution that a company will use to disseminate material information. The SEC encouraged issuers to take sufficient steps to give investors and the markets advance notice of the channels that may be used to disseminate material non-public information, including disclosing on their corporate websites the specific social media channels they intend to use. The SEC also noted that disclosure on the personal social media site of a corporate officer – even one with a large number of "friends" or "followers" – is unlikely to qualify as a recognized channel of distribution unless investors receive advance notice that the site may be used for disclosure of material non-public company information.
While it may have disapproved of Hastings’ Facebook posting,3 the SEC also appears to have believed that its 2008 Guidance was not adequate to address current advances in the ever-changing world of real-time investor disclosure. Having now provided new guidance through the Report, the SEC’s Division of Enforcement likely will pursue investigations of issuers and their officers who disclose material non-public information through social media sites without first complying with Regulation FD and the SEC’s current guidance.
In light of this new guidance, public company legal departments should work closely with their investor relations and public relations departments to review their corporate communications policy and determine whether they want to implement social media disclosure of material non-public information. If a public company does choose to add social media as a "recognized channel of distribution", then it must tell investors in advance, typically through prominent disclosure on its website, in its press releases and its 8-K, 10-Q and 10-K filings, that it may use specified social media to make announcements of material non-public information. Some public companies have several Facebook pages and Twitter feeds, so it is important to identify which ones may be used for the disclosure, and include the web addresses and how to access them or a hyperlink on the website to the social media channels that may be used.
Public companies that add social media as a Regulation FD disclosure channel should establish a pattern of regularly using the same social media channels, so they can track the extent to which those social media sites are being used by investors and the market. When using social media for Regulation FD disclosure, public companies should ensure that each message stands on its own and includes a link to the company’s website, press release or SEC filing. The material information should be easily recognizable, not buried in unrelated messages, posts or blogged information.
Social media disclosure of earnings or other financial information also must comply with Regulation G – disclosure of non-GAAP financial measurements must include the corresponding GAAP financial measure and either a reconciliation of the non-GAAP measure to the comparable GAAP financial measure or a link to the required reconciliation on the company’s website. Similarly, either a forward-looking statement legend or a link to that legend on the company’s website should be included when appropriate.
In addition, the corporate communications policy should address additional restrictions on the company’s use of social media that may be required during securities offerings, proxy contests, tender offers, mergers or acquisitions. Close coordination among the legal, investor relations and public relations departments will be key to ensuring that the company does not prematurely disclose or otherwise violate the securities laws in connection with a particular corporate transaction.
Many public companies that have appropriate procedures and well-trained professionals in their investor relations department may not have extended the same procedures and training to the personnel handling their social media. It is important that personnel responsible for a public company’s social media be trained in what constitutes material non-public information, what the corporate communications and insider trading policies are, which social media sites are being used as channels to distribute that information, and the timing of that distribution. The corporate communications policy should specifically identify who is authorized to speak on behalf of the company, and all employees – including any who have corporate blogs or otherwise communicate corporate information on social media – should be made aware of the policy. Companies cannot avoid liability under Regulation FD or other securities laws just because the person communicating via social media is not a senior officer or authorized representative of the company, but having a policy that clearly identifies who is an authorized representative may help the company show that a particular disclosure wasn’t intended to be an official company communication.
Even with advance notice of where material information will be disclosed, the use of social media for Regulation FD disclosure still involves risks to public companies. Hackers or others may try to use a company’s social media channels to manipulate its stock price or otherwise cause market problems, as demonstrated by the recent dramatic drop in the Dow Jones industrial average due to false information posted on The Associated Press’ Twitter feed by a hacker. Public companies should monitor their social media sites regularly in order to promptly correct any misinformation, post updated information in a timely manner, watch for hackers and verify that the sites are being widely used. When uploading information to a website or other channel for release at a particular time in the future, companies should secure the information on a password-protected area of the website so that it can’t be accessed early by hackers, "bots" or web crawlers.
Now that the SEC has provided guidance on the use of social media for Regulation FD disclosure, we can expect the SEC Division of Enforcement to be especially vigilant in monitoring disclosure over social media, checking to see if the company has alerted investors and the market to look on that site for material information. While many public companies are using social media sites as a supplement to more established disclosure channels, we expect that most companies will continue to file or furnish a Form 8-K, publish information on their websites and, in many cases, issue press releases as the primary methods of disclosing material information.