Speed read

The U.S. Securities and Exchange Commission (“SEC”) confirmed on April 2, 2013 that issuers may use social media outlets like Facebook and Twitter to communicate material nonpublic information in satisfaction of their obligations under Regulation FD (Fair Disclosure), provided that they give investors prior notice of their intent to do so.  This is an extension of the guidance that the SEC issued in 2008 with respect to disclosure of information on company websites.  

Background

Regulation FD, adopted in 2000, requires that when issuers disclose material information they must disclose it to all investors at the same time.1  The regulation was intended to prevent issuers from selectively disclosing material information to certain securities professionals or investors without simultaneously making the information available via a “broad, non-exclusionary distribution of the information to the public.”  While no particular method of disclosure is required, a company’s deviation from its standard disclosure practices is a key factor in determining whether a particular disclosure method is reasonable.  In 2008, the SEC clarified that disclosure via company websites is an effective means for disseminating information to investors if the company previously issued a press release with the web address where the information would appear.2  

Until now, the SEC had not issued guidance on whether social media outlets (many of which are subscription-based) are permissible channels for distribution of corporate information.  The SEC’s guidance is helpful as companies and investors are increasingly relying on social media.

Reed Hastings’ Controversial Facebook Post

The SEC's views on social media use are contained in a report prepared in connection with the SEC’s investigation of Netflix, Inc. (“Netflix”) and its CEO, Reed Hastings, relating to a Facebook post that Hastings made on his personal Facebook page in July 2012.  Specifically, Hastings posted on his Facebook page that “Netflix monthly viewing exceeded 1 billion hours for the first time ever in June [2012].”

Hastings’ Facebook page at the time had over 200,000 followers.  The controversial post was tweeted by TechCrunch, a technology media outlet with approximately 2.5 million followers on Twitter, and was also picked up by the mainstream press.  While Hastings subsequently indicated he did not believe the post contained material information, Netflix stock rose from $70.45 at the time of the post to $81.72 by the close of the next trading day.

Netflix did not (1) make an SEC filing disclosing the viewership milestone, (2) include this information in a press release, or (3) post this information to its company website or company Facebook page.  Neither Hastings nor Netflix had previously used Hastings’ Facebook page to announce company results, nor had they taken steps to alert investors that the page might be used to communicate information about the company.

The SEC Investigation and Report

On December 5, 2012, the SEC staff issued a "Wells" notice to each of Netflix and Hastings, warning that it was considering taking action against them for possible violations of Regulation FD.  After conducting an investigation of Netflix and Hastings, the SEC determined not to bring an enforcement action or allege any wrongdoing and instead issued a report of investigation to give broad guidance on corporate disclosures via social media.

Recognizing that “the use of social media has proliferated”, the SEC’s report confirms that social media channels are an acceptable medium for distribution of corporate information, as long as investors are aware of the specific channels that will be used.  According to George Canellos, Acting Director of the SEC’s Division of Enforcement, “Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don't know that's where they need to turn to get the latest news.”

The SEC’s report makes clear that issuers must inform the market (via website or press release) about the specific social media sources that they will use and the types of information that they will disclose through these sources.

Conclusion

Issuers should review their communications/social media policies (as well as Regulation FD compliance policies) to make sure that material nonpublic information is only disseminated through social media channels that have been clearly identified to investors in advance.  We would recommend that issuers use corporate (rather than personal) social media accounts, be consistent in their use of those accounts and routinely include notice in SEC filings of such use.  Issuers should also be aware that disclosure via social media for purposes of Regulation FD does not substitute for Form 8-K or 6-K disclosure, if such disclosure is required