On April 2, the SEC issued a report of investigation under Section 21(a) of the Exchange Act in which it confirmed that public companies may use social media outlets such as Facebook and Twitter to disseminate material, nonpublic information in compliance with Regulation FD (Fair Disclosure). Under the guidance furnished in the SEC’s report, companies must provide advance public notice of the social media outlets they will use for this purpose and take other actions to establish that the outlets are a “recognized channel of distribution” for the broad and non-exclusionary communication of such information.
The SEC’s report, which is set forth in Release No. 34-69279 and further discussed in SEC Press Release 2013-51, was triggered by an SEC investigation of a post by the CEO of Netflix, Inc. on his personal Facebook page that disclosed a corporate milestone achieved by his company. The SEC did not initiate an enforcement action or allege wrongdoing by Netflix or its CEO with respect to this disclosure. Instead, recognizing that there has been “market uncertainty” about the application of Regulation FD to the use of social media, the SEC issued its report to address the circumstances in which social media will qualify as an acceptable method of broad, non-exclusionary disclosure. In the report, the SEC for the first time extends to social media its 2008 guidance on how companies can comply with Regulation FD in using their corporate web sites to communicate with the securities marketplace.
Regulation FD prohibits the selective disclosure, by an issuer of securities registered under the Exchange Act or by "any person acting on its behalf," of material, nonpublic information to securities market professionals or to holders of the company's securities who reasonably can be expected to trade on the information. Regulation FD requires (1) simultaneous communication to the public of "intentional" disclosures of material, nonpublic information made to a covered recipient, and (2) "prompt" communication to the public of "non-intentional" disclosures of such information after a senior official discovers the disclosures and realizes (or should realize) that the information was material and nonpublic.
The methods of public disclosure under Regulation FD must be "reasonably designed to provide broad, non-exclusionary distribution" of the information. Based on historical guidance and practice, the methods used to comply with the regulation often include disclosure in a Form 8-K report or other SEC filing, the issuance of a widely disseminated press release (coupled in some cases with a conference call that is adequately publicized in advance and open to the public), or disclosure on a corporate web site that qualifies as a recognized channel of distribution.
Facebook post by the Netflix CEO
The SEC issued its report following an investigation of the circumstances surrounding a post made by the Netflix CEO on his personal Facebook page in July 2012. The CEO noted in his 43-word post that in the month of June 2012, "Netflix monthly viewing exceeded 1 billion hours for the first time ever." The milestone of one billion hours represented an increase in streaming hours of nearly 50% over the previous milestone, which Netflix had announced in a press release six months earlier. The post was made available to the more than 200,000 subscribers to the CEO’s Facebook page. The subscribers included persons within the enumerated classes of recipients to which Regulation FD applies, including research analysts associated with registered broker-dealers and shareholders, as well as reporters and bloggers. The SEC’s report indicates that trading prices of Netflix’s stock rose after the CEO made his post and the announcement of the streaming milestone reached the market.
Before the post, neither the CEO nor Netflix had used the CEO’s personal Facebook page to announce company results or had publicly announced that the page would be used to disclose information about Netflix. Netflix did not file or furnish a Form 8-K reporting the information in the CEO’s post, did not issue a press release with the information, and did not take any other action to disclose the information publicly.
Application of 2008 guidance to social media
In its report, the SEC states that the considerations for the use of social media channels “are not fundamentally different” from those previously addressed by the SEC with respect to the ways in which companies have used corporate web sites, “push” technologies such as e-mail alerts, and interactive communication tools such as blogs. In light of the similarities, the SEC directs companies using social media to disclose material corporate information to evaluate their compliance with Regulation FD in light of the considerations discussed in the SEC’s 2008 interpretative release on the use of corporate web sites and such other communications technologies. We discussed this guidance in the SEC Update we issued on August 29, 2008.
The 2008 guidance describes a non-exclusive list of considerations companies should take into account when using their web sites to communicate important corporate information to shareholders and securities market professionals. The SEC stated in its 2008 release that the following three conditions must be satisfied for information posted on a corporate web site to be “public” or publicly “disseminated” under Regulation FD:
- Recognized distribution channel: The company’s web site must be a “recognized channel of distribution” for information about the company and its business, financial condition, and operations.
- Marketplace availability: The posting of information on the web site must result in the dissemination of the information in a manner that makes it available to the securities marketplace in general.
- Reasonable waiting period: There must be a reasonable waiting period for the securities marketplace to react to the posted information before the company should consider the information to be publicly disclosed (e.g., for purposes of permitting insiders to trade in the company’s stock).
The SEC’s report confirms that the foregoing considerations apply with equal force to communications made through social media channels.
Using social media to disclose material corporate information
A company should consider the following actions when reviewing the potential use of social media channels in light of the SEC’s guidance.
Determine how the channel will be used. The company should consider how a particular social media channel will fit into its current system of disclosure policies and practices. For this purpose, it is important for the company to consider, among relevant factors:
- Whether the channel will be used for communications to the market on a broad basis, or for targeted communications (such as addressing customer concerns) that would not be appropriate for use in disclosing material corporate information; and
- How the channel will be used in relation to the company’s other disclosure outlets (such as press releases, filings with the SEC and the company’s corporate web site).
- Consider whether personal social media sites should become part of the disclosure system. The company should consider whether and to what extent the company officials should be permitted to make disclosures relating to the company on their own social media sites. The SEC cautioned in its report that personal sites, irrespective of the number of social media contacts associated with them, “would not ordinarily be assumed to be channels through which the company would disclose material corporate information.” In evaluating the potential use of a personal social media site to announce material corporate news, the company should consider whether the company officer uses the personal site to communicate with the market about company matters, rather than primarily to discuss personal views and matters not related to company business.
Provide advance notice to the public of intended use of the channel. In its report, the SEC emphasizes the importance of providing advance public notice of any social media channels the company intends to use for disclosing material corporate information. Such a notice should indicate the types of information and timing of disclosures the company expects to make through the channel, the steps members of the public may take to access the channel, and the date on which the company intends to begin using the channel for disclosure purposes. The company may use a number of methods to provide the required advance notice, including:
- Announcement in a widely disseminated press release;
- Disclosure in a voluntary filing on Form 8-K;
- Disclosure in one or more periodic reports on Form 10-Q or Form 10-K; or
- Disclosure on a company web site that itself is a recognized channel of distribution for Regulation FD purposes.
After the SEC issued its report, Netflix elected to disclose in a Form 8-K report that it intends to communicate information about the company, the company’s services and other issues through U.S. social media channels that include two company blogs, the company’s Facebook page, the company’s Twitter feed, and the CEO’s public Facebook page.
- Use the channel consistently and regularly. Once the company has announced that it will use a specified social media channel to make material corporate disclosures, it should use the channel in a manner consistent with its announcement and follow a pattern or practice of communicating corporate information through the channel. Regular use of the channel is appropriate to build and reinforce marketplace recognition that investors and other market participants should look to the channel for important information.
The company should pay careful consideration to whether it can establish the required level of marketplace recognition. This requirement has led some companies to conclude that their corporate web sites would not qualify as eligible channels for the announcement of material corporate news, but instead should continue to be used as repositories for material information they previously announced by press release or disclosed in SEC filings.
- Provide accurate and complete disclosures through the channel. It may be tempting to disclose material corporate information through a social media channel in the same informal manner that characterizes other social media communications. Communications of material corporate information through social media channels, however, must meet the same disclosure standards as communications via more traditional disclosure outlets. Accordingly, the company should seek to ensure that its communications of key corporate developments through social media are presented in a manner that does not misstate or omit material information.
- Take into account the channel’s operational characteristics. Some social media channels contain operational characteristics or limitations that will require special consideration if they are used to communicate material corporate information. Twitter, for example, contains a 140-character limit on communications. As a result, communications via Twitter may require additional attention to ensure that the character limitations do not result in abbreviated disclosures that could constitute a misstatement or omission of a material fact or otherwise violate legal requirements. Some companies address this limitation by using links to incorporate into the posts related information they have previously or contemporaneously disclosed in press releases, SEC filings, or other disclosure outlets. The linked material may contain more complete disclosure, cautionary language with respect to forward-looking statements, and any reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures required by the SEC’s Regulation G.
- Ensure the posted information is available to the marketplace. The posting of information on the social media channel should be readily available to investors and the marketplace in general. In some instances, success in meeting this requirement might be evident in the extent to which disclosures on the social media channel are reported in the general media or reflected in the market for the company’s securities.
Give investors a reasonable waiting period to react to the posted information. Investors must be afforded a reasonable waiting period to react to the information disclosed through the social media channel before the company should consider the information to have been publicly disclosed. The SEC has indicated that what constitutes a reasonable waiting period will depend on the circumstances of the disclosure. In the case of disclosure through social media, such circumstances may include the following:
- The size and market following of the company, including with respect to the social media channel utilized by the company;
- The extent to which prior disclosures through the social media channel have been picked up by the market and generally available media; and
- Whether the company has taken steps (including using other channels of distribution) actively to disseminate the information communicated through the social media channel.
- Update disclosure controls and procedures to address social media. The company should review and update its disclosure controls and procedures, including any disclosure or Regulation FD policies, as necessary to make sure that they adequately address the use of social media channels. As with other communications concerning the company, advance review by compliance personnel should be required of any proposed disclosures of material, nonpublic information on social media channels, with particular attention paid to the possibility that the proposed disclosures may be misleading if they are truncated to meet actual or perceived needs for conciseness and appeal.
The reporting community should welcome the SEC’s acknowledgement, 13 years after it adopted Regulation FD, that companies may use social media channels in some circumstances to satisfy their public disclosure obligations under the regulation. This acknowledgment, however, does not mean that the announcement of material corporate information through social media outlets will serve the needs of a company’s investors better than disclosure through traditional channels. Companies will have to consider, among other factors, whether the costs of additional financial and legal review of social media announcements will be justified by the benefits of using the new disclosure channels.
The SEC believes that its guidance on social media postings should be applied in a flexible and adaptive manner, due to its expectation of continued technological advances that might require a change in the method of analysis. Further, because the 2008 guidance eschews bright-line guidelines in favor of a particularized, facts-and-circumstances approach to Regulation FD compliance, companies will have to exercise care in applying the guidance to their use of social media. There is no “one size fits all” standard of disclosure or “bright-line” test for evaluating compliance with Regulation FD. The facts and circumstances relating to the use of any social medial channel will have to be assessed in light of all relevant considerations, including those highlighted in the SEC’s guidance.