Recognizing the growing influence and reach of social media, the SEC announced on April 2, 2013 that public companies may use social media outlets such as Facebook and Twitter to disclose material non-public information in compliance with Regulation FD under the Securities Exchange Act of 1934.1 The SEC’s recognition of the value of social media outlets for corporate disclosure is consistent with its recognition in 2008 that corporate websites also may be used as a means to disseminate information in compliance with Regulation FD.2
The SEC’s release notes that, in order for a company to use social media to release material non-public information, the disclosing company must notify investors in advance that a particular social media outlet will be used to disseminate corporate information and such outlet should be reasonably designed to enable broad, non-exclusive distribution of information. Even though the SEC now condones the use of social media to release material non-public information, companies should be mindful that the requirement for accurate and complete disclosure transcends whatever disclosure medium that a company elects to use. Companies should use the same level of care when making disclosures made via social media outlets as they would for the release of such information via more traditional disclosure methods such as press releases and Form 8-K reports.
The SEC’s April 2nd release regarding social media disclosure arose from comments made on Facebook by Reed Hastings, CEO of Netflix. In announcing that it is dropping its enforcement proceeding against Hastings and Netflix, the SEC provided insight into how companies can use social media as a channel for the disclosure of important corporate information. Our analysis of the April 2nd release indicates that companies may use social media as a valuable corporate disclosure tool. We would suggest that companies consider the following in formulating their own social media corporate disclosure policies.
The first question for a company to consider is whether it should use social media at all for its corporate disclosures. If a company believes that its current disclosure channels work well, it should consider whether changing its practices in favor of using Facebook or Twitter would be better (or worse) for its investors. The effectiveness of social media disclosure may vary depending on various factors, such as shareholder demographics or the industry in which the company operates.
Second, if a company elects to use social media, it should carefully consider which social media outlet to use. A company should consider whether a particular outlet is broadly accessible to investors and the typical use of such outlet by investors and the market to determine whether it is appropriate for disclosure of company information. Companies should keep in mind that the paramount goal is to make information available to all investors simultaneously, rather than to selectively distribute information to certain investors.
Third, companies should designate specific social media accounts where they plan to disseminate material non-public information about the company and notify investors in advance that the company intends to use these social media accounts to disseminate information in the future. As the SEC notes, companies should not use the personal social media accounts of officers, directors, or employees to disclose material non-public information because investors may not expect to receive company information via personal accounts. The SEC report notes that companies should let investors know which social media outlets it intends to use through more traditional means of communication such as Form 8-K reports, press releases or company websites. If necessary, such notification should include instructions specifying how to “follow,” “friend,” or otherwise access news about the company from the social media outlet.
Fourth, companies should consider whether the nature of the information to be disclosed could make a difference in the selection of the channel to be used. Facebook and Twitter postings might work better for fairly concise corporate announcements such as management promotions than for more extensive and detailed disclosures such as pro forma financial information giving effect to an acquisition. Companies might consider using different channels for different kinds of information but also should be mindful that using different channels might be confusing to investors. A company that follows this approach should announce its rules for using different channels to investors in advance.
Fifth, as noted above, companies should not let the seductive ease of social media outlets such as Facebook and Twitter compromise their disclosure standards. Any disclosure of material non-public information—whether by means of Form 8-K, press release, corporate website or social media—should be subject to rigorous drafting and review procedures. All disclosures, regardless of the channel selected, should be treated with the same degree of corporate formality and seriousness. Companies should consider setting up controls and procedures for access to and use of their social media accounts and seek the input of the finance department, legal department, investor relations department and other similar functional groups before disclosing material nonpublic information.
Finally, depending on their circumstances, companies may wish to use more traditional means of disclosing material non-public information in tandem with the use of social media outlets. Companies should consider using Form 8-K reports, press releases or company websites as reliable, proven and fairly inexpensive backstops for disclosures made through a social media outlet.
Overall, the disclosure of material information is one of the most important obligations of any public company and management teams should resist any popular pressure to use social media for disclosure because it is “cool” and others are doing it. Ultimately, any decision to use social media outlets for corporate disclosure instead of more traditional channels should be based on which channel will result in the most reliable and timely disclosure of material information.