Social media is one of the hottest topics in public company disclosure these days. Much of the discussion revolves around Regulation FD, external communications policies and disclosure controls and procedures, and most companies have moved from whether to how to incorporate social media into their regular public communications.
As you are working through these issues, here are four things to consider that you may not already know:
Number 1: The SEC staff reviews your company’s (and affiliates’) social media communications.
Whether conducting its SOX-mandated tri-annual (or more frequent) review of your periodic reports or reviewing a Securities Act registration statement, the SEC staff now routinely reviews company-sponsored and affiliate social media communications to be sure that information is consistent with the disclosure in your filings. Of particular focus is the MD&A, including its descriptions (or lack thereof) of known trends and uncertainties. The staff will wonder why information considered significant enough to tweet about, post on Facebook or highlight on your web site is not discussed, or is given short shrift, in your “official” disclosures. (They likewise review your risk factors, analyst presentations and earnings calls for the same reason.)
Number 2: Prophylactic attempts to establish a “recognized channel of distribution” probably don’t work.
By now you know that the SEC staff provided guidance back in 2008 that said disclosure of material nonpublic information via a “recognized channel of distribution” (RCD) may not violate Regulation FD. In its April 2, 2013 Report of Investigation regarding the Netflix CEO’s Facebook post of arguably material nonpublic information, the staff made it clear that this concept applies to social media, as well as website, disclosures.
Some companies have begun disclosing on their web sites and in periodic reports that they might use one or more designated channels of communication at some time in the future to make material disclosures. While the staff has not yet addressed whether this catch-all approach to establishing an RCD actually works, most observers think its chances fall somewhere between unlikely and no way. Keep in mind that whether a specific medium is an RCD depends (according to the staff’s guidance) not only on the steps the company takes to alert the market, but also the company’s “disclosure practices.” It seems obvious that this type of hypothetical approach is not the substantive disclosure practice that the staff has in mind.
Number 3: Hyperlinks from social media communications to periodic report disclosures may (or may not) provide antifraud protection.
A problem with using social media to disclose material information is its limited content (for example, 140 characters) and style. No one wants to include detailed legal language on their Facebook page. The problem, however, is that abbreviated, incomplete social media communications risk violating the antifraud provisions of the securities laws. A possible solution, which many companies are beginning to use, is to hyperlink from the social media communication to the relevant section of a periodic report, thereby providing the extra color and context to round out a tweet or a post.
So long as the social media communication itself is not misleading, then this hyperlinking solution should work. Unfortunately, the SEC has not yet addressed this approach. While it is logical to believe that a good hyperlink cures a potential antifraud violation, the reality will remain uncertain until the staff provides guidance, preferably sooner rather than later.
Number 4: Social media is becoming a popular way to get out the vote for annual shareholder meetings.
There’s nothing wrong with using social media to encourage shareholders to vote with management at an upcoming annual meeting. Note, however, that such communications are considered to be supplemental proxy materials under Rule 14a-6 of the Exchange Act. Therefore, they must be filed with the SEC not later than their date of first use.