As we highlighted at the end of last year, the SEC issued a Wells notice to Netflix Inc. regarding a post by Netflix CEO Reed Hasting on his personal Facebook page. On April 2, 2013, the SEC issued a report of investigation (PDF) stating that the SEC would not pursue enforcement action against Netflix and addressing the application of Regulation FD to a public company’s use of social media websites (the “Report”).
In approving a public company’s use of social media channels, the Report confirms that the SEC’s August 2008 Guidance on the Use of Company Websites (PDF) applies to social media channels and further highlights that “the investing public should be alerted to the channels of distribution a company will use to disseminate material information.” The SEC further noted in the Report that “in light of the direct and immediate communication from issuers to investors that is now possible through social medial channels, such as Facebook and Twitter, we expect issuers to examine rigorously the factors indicating whether a particular channel is a ‘recognized channel of distribution’ for communicating with investors.”
OUR TAKE: The Report confirms that a public company may use social medial channels and remain in compliance with Regulation FD if the company takes the necessary steps of first alerting investors, the market, and the media of the social media channels the company anticipates using.
The question remains, however, whether social media channels are the best way to disseminate material, nonpublic information. The need for conciseness on certain social media channels may cause messages to be misleading or confusing to investors. For example, Twitter limits the amount of characters in individual tweets to 140 characters (117 characters if the tweet includes a URL link). While messages can be parsed into multiple tweets, each tweet may be read separately and re-tweeted by others. Companies will need to be careful in ensuring that each message posted on social media channels can stand on its own or clearly reflect that the message is part of a chain of communication. The security issues with public social media channels are also a cause for great concern and we have already seen the effect a false tweet can have on the stock market.
Having another avenue to disseminate material information can be beneficial to public companies so long as the appropriate measures are taken to ensure that disclosures made on social media channels are clear and unequivocal and the use of such channels is secure.