In this high-tech world dominated by social media, companies are increasingly utilizing platforms such as Facebook and Twitter to promote their products or services, and to report on important events and milestones. Public companies, however, must keep in mind that information disseminated via any form of social media must satisfy the public disclosure requirement of Regulation FD (Fair Disclosure). The Securities and Exchange Commission (“SEC”) clarified its position on the use of social media in an April 2, 2013 Report of Investigation (the “Report”).1
- Regulation FD
Regulation FD requires that when an issuer, or a person acting on its behalf, discloses material, nonpublic information to specific enumerated persons,2 where it is reasonably foreseeable that they will trade on the basis of that information, the issuer must distribute that information in a manner reasonably designed to achieve effective, broad and non-exclusionary distribution to the public.3 When the disclosure of material, nonpublic information is intentional, dissemination of the same information to the public must be made simultaneously. When the disclosure of material, non-public information is inadvertent, dissemination of the same information to the public must be made promptly afterwards. As set forth in Regulation FD’s Adopting Release, effective methods of dissemination in 2000 included conference calls, press releases and Form 8-Ks.
In August 2008, the SEC issued updated guidance concerning Regulation FD to address the increased reliance on electronic media.4 The 2008 Guidance was directed primarily at the use of issuer websites as a method of disseminating information in compliance with Regulation FD. The guidance also anticipated continued technological advances, and therefore provided guidance that was designed to be flexible and adaptive. Specifically, the 2008 Guidance provided issuers with a factor-based framework for analysis, rather than static rules applicable only to web sites. While the 2008 Guidance offered a non-exhaustive list of factors to be considered in evaluating whether a corporate website constituted a recognized channel of distribution, the central focus of the guidance concerned whether the company made investors, the market, and the media aware of the channels of distribution the issuer expected to use. The focus was to inform parties of where to look for disclosures of material information about the company or what they need to do to be in a position to receive the information.
- The Netflix, Inc. Investigation
In December 2012, the SEC initiated an investigation concerning whether Netflix, Inc. (“Netflix”) and its Chief Executive Officer, Reed Hastings (“Hastings”) violated Regulation FD and Section 13(a) of the Securities Exchange Act of 1934 when Hastings’s used his personal Facebook page to announce that Netflix had streamed 1 billion hours of content in the month of June 2012.
The SEC’s investigation focused on the fact that neither Hastings nor Netflix had previously used Hastings’s personal Facebook page to announce company metrics, and Netflix had not previously informed shareholders that Hastings’s Facebook page would be used to disclose information about Netflix. In addition, the post was not accompanied by a press release, a post on Netflix’s own web site or Facebook page, or a Form 8-K. Only after market close did mainstream media and research analysts learn of the news.
- The Report of Investigation
During the course of its investigation, the SEC learned that questions concerning the interplay between Regulation FD and the use of social media were widespread. As such, the SEC declined to prosecute Netflix or Hastings for the June 2012 post. Instead, the SEC issued a Report to specifically address the application of Regulation FD to Hastings’s post, and to clarify the applicability of the Commission’s August 2008 Guidance on the Use of Company Web Sites to emerging technologies, including social networking sites, such as Facebook.
In the Report, the SEC stated that communications made via the use of social media require the same Regulation FD analysis as the more traditional forms of communication, including press releases, conference calls and postings on a company website. Specifically, the Report established that the SEC expects issuers to examine whether newer forms of communication such as their Facebook pages and tweets can be deemed recognized channels of distribution for investor communication. Such analysis is needed to confirm compliance with the requirements of Regulation FD.
In addition, the SEC clarified in the Report that the information contained in the 2008 Guidance can and should be applied to disclosures made through social media channels. The SEC explained that the most important consideration for the company is whether its investors are aware of the new channels of distribution, and if the company has taken affirmative steps to alert the market about which forms of social media it intends to use to disseminate material, nonpublic information.
- Best Practice When Utilizing Social Media
Since issuers are on notice of the SEC’s position on social media, companies should review, and where necessary revise, their Regulation FD policies and procedures. Per the SEC’s guidance in the Report, policies and procedures should include clear guidance on the use of social media for any company business. Best Practices include:
Utilize Recognized Channels of Distribution. The use of social media should be limited to easy to access communication channels, such as official company Facebook pages or Twitter “handles,” and should be monitored by the Investor Relations Department. Before the use of any social media to disseminate company information, a company needs to ensure that its chosen forums are recognized channels of distribution, and that investors are aware that the company is using these outlets to disseminate material. A company should make investors aware of its social media usage by prominently placing a link to social media channels on a company’s website, and including information about the company’s use of social media in quarterly and year-end filings. Each company press release should also include a paragraph about the company’s use of social media sites and identify how to access those sites.
Ensure Ease of Access. In addition, the company must ensure that investors can easily access the social media channels it wishes to utilize. Specifically, a company should clearly identify the steps necessary for investors to reach its social media channels, including instructions on how an investor may subscribe, join or register. A company should limit its use of social media to no-charge sites and services. Finally, companies who are already utilizing social media channels for investor information should make sure the links to social media pages are current, and that accurate instructions are given on how to access such channels.
Control Communications Posted. Only specific individuals within the company should be authorized to utilize the official company social media sites to post or tweet about company business. As always, any information concerning the company disseminated via any form of communication, including social media, should be reviewed for accuracy and compliance with Regulation FD.
Be consistent. Once a company announces that it intends to post certain information on social media sites, the company should be consistent about doing so. If the company uses its social media outlets sporadically or inconsistently, investors will not be able to rely on getting information through those outlets and future disclosures made that way are not likely to pass muster under Regulation FD.
Be careful about abandoning traditional communication techniques. Social media can be a terrific way to communicate with the market and the SEC has signaled that effective and appropriate use of social media is workable under Regulation FD. However, the tried and true methods of communicating with the market -- such as wide dissemination of press releases and company websites -- are still the safest. Augmenting those disclosures with simultaneous use of social media can be very helpful, but abandoning traditional communication techniques to adopt solely a social media communication strategy is probably still very risky.