While social media has emerged as a powerful tool to connect with customers and shareholders, executives of publicly-traded companies should proceed with caution when communicating information about their company or its securities electronically, including through the use of social media. As the line between executives’ personal and professional lives continues to blur through social media, companies should be aware that these new channels of communication pose risks that require an updated approach to corporate communications. Recent actions by the Staff of the US Securities and Exchange Commission involving Netflix indicate that they may apply a very traditional lens to these modern forums.
The best way to mitigate these risks is through creating a culture of understanding as to how applicable regulations and other rules apply to executives’ use of social media.
- Adopt a Social Media Policy which clearly lays out what information can and cannot be shared on Facebook, Twitter, Pinterest and other networks.
- Administer mandatory training for all employees on the Social Media Policy and build appropriate controls into business processes.
- Consider a broader Communications Policy and/or Code of Conduct for employee communications across all channels (email, text, etc.).
- Be particularly careful about electronic communications in the context of securities offerings, including initial public offerings, to avoid "gun jumping."
The SEC recently issued a "Wells Notice" to Netflix and CEO Reed Hastings indicating they had begun investigating statements that the CEO had made on Facebook in July of this year. Specifically, the SEC is currently examining whether Hastings’ statements may have violated Regulation Fair Disclosure, or Reg FD, which contains strict requirements pertaining to non-public statements made by public companies. Hastings (who is on the Board of Directors of Facebook) posted that Netflix reached a milestone of 1 billion hours of streamed video in a month for the first time.
Regulation FD generally requires a public company that selectively discloses material non-public information regarding itself or its securities to persons outside of the company to make public disclosure of that information by means of a Form 8-K or "another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public." The regulation distinguishes between material information that a person selectively discloses intentionally and information that is disclosed non-intentionally. If the person making the selective disclosure knows or is reckless in not knowing that the information is both material and nonpublic, public disclosure of that information must be made simultaneously. In all other cases, public disclosure of the information must occur promptly after the selective disclosure.
Regulation FD does not mandate the use of any one method of effecting public disclosure. Instead, the SEC leaves the decision to the issuer to choose methods, taking into consideration its particular circumstances, that are reasonably calculated to make effective, broad, and non-exclusionary public disclosure. Aside from filing or furnishing a Form 8-K or in certain circumstances including the disclosure in other SEC filings, issuers may, as a general matter, satisfy the public disclosure requirement through distribution of press releases through a widely circulated news or wire service. They may also make such disclosure through announcements at press conferences or on conference calls that interested members of the public may attend or listen to either in person, by telephone or by other electronic transmission (including use of the Internet), so long as they provide adequate prior notice to the public of the conference or call and the means for accessing it. Although the SEC has issued some guidance on the use of company websites to disclose certain types of information under Reg FD where such websites are "recognized channels of distribution," it has not addressed social media networks directly.
While the Silicon Valley technology community has sided with Hastings and advocated a broader interpretive approach, there is still a good likelihood that the SEC could conclude its investigation by bringing suit against Netflix and its CEO. This prospect in turn raises questions regarding exposure for other public company executives. Should a recent tweet by a public company’s chief executive officer that his company had become "narrowly cash flow positive" and "continued improvement expected throughout the year" be treated as having violated Regulation FD? Although it is not clear whether this information is material under Regulation FD, that company’s decision not to make any corresponding disclosure in a Form 8-K SEC filing or press release might have been different in light of the Netflix action.
Until the SEC better aligns the current disclosure regime and guidance under Regulation FD with developments in the use of social media as a corporate communication tool, companies should take appropriate steps to assure compliance with existing law and regulations.