The Securities and Exchange Commission has provided new guidance to public companies regarding ways they can publicly disclose material information for the first time via social media while complying with Regulation FD. Regulation FD generally prohibits selective disclosure of material nonpublic information unless the information is made public at the same time. The guidance came in the form of a report following an investigation by the SEC’s enforcement division concerning the use of a personal Facebook account by the CEO of Netflix to announce arguably material information. The report indicates the SEC staff’s view that public companies may announce material nonpublic information on social media outlets like Facebook and Twitter, provided that companies take appropriate steps to alert investors which social media outlets they will use for the dissemination of such information.
THE NETFLIX CASE
In July 2012, Reed Hastings, Netflix’s CEO, posted a message on his personal (but public) Facebook page regarding monthly viewing having exceeded one billion hours for the first time ever in June 2012. Mr. Hastings had not previously used his public Facebook page for new corporate announcements nor had he or Netflix previously indicated it would be utilizing this Facebook account (or a corporate Facebook page) for disclosure of material information. Netflix did not file a Current Report on Form 8-K with the SEC, nor did it issue a press release containing this information or publish the information on its website or corporate social media outlets. Netflix’s stock price jumped nearly 16% by the end of the following trading day. Although the SEC ultimately decided not to take action against Mr. Hastings, the report concluded that this particular disclosure on a corporate officer’s personal Facebook page did not qualify as an acceptable channel of distribution of material nonpublic information under Regulation FD. However, the report provides helpful guidance to public companies on how to properly use social media outlets to disseminate material nonpublic information in compliance with Regulation FD.
REGULATION FD AND THE 2008 GUIDANCE
Under Regulation FD, when a public company, or a person acting on its behalf, discloses material nonpublic information on a selective basis to certain securities professionals, shareholders and others, it must make prior or simultaneous disclosure of that information to the general public.1
Since the adoption of Regulation FD in 2000, public companies essentially have had two SEC-approved alternatives for complying with this public disclosure requirement: (1) furnish a Current Report on Form 8-K containing the information or (2) issue a press release on the major wire services.
In 2008, as a result of public companies’ increased use of corporate websites to provide disclosure, the SEC issued guidance that laid out a three factor test for determining whether information posted to a company’s website is “public” for purposes of Regulation FD: (1) whether the company’s website is a “recognized channel of distribution”; (2) whether posting of information on a company’s website “disseminates” the information in a manner making it available to the securities marketplace in general; and (3) whether there has been a “reasonable waiting period” for investors and the market to react to the posted information. For a more detailed description about the 2008 guidance, see our client advisory: “SEC Encourages Increased Use of Websites by Public Companies.” The SEC’s guidance was meant to be flexible to encompass technologies besides websites – such as “push” notification services like email alerts, RSS feeds and blogs – but did not explicitly cover most social media outlets.
THE NEW GUIDANCE AND WHAT IT MEANS FOR YOUR COMPANY
In its Netflix report, the SEC noted that the disclosure of material nonpublic information on a selective basis through social media outlets is subject to Regulation FD analysis and that social media outlets were extensions of the “push” notification services it referred to in the 2008 guidance. Public companies wishing to take advantage of social media outlets as a way to comply with Regulation FD must therefore take the necessary steps to alert investors and the market to the specific social media outlets they intend to use for the disclosure of material nonpublic information. The 2008 guidance encouraged companies to indicate in press releases and periodic reports, and provided other useful steps to ensure, that a corporate website may be a “recognized channel of distribution.” The SEC’s report adds to this, stating that companies will want to consider disclosing on their corporate websites and elsewhere which social media outlets investors should look to in order to obtain key disclosures. Notably, since the report came out, Netflix has issued a Current Report on Form 8-K and updated its website to provide a list of possible social media outlets on which it may communicate material information – including Mr. Hastings’ public Facebook page.
As discussed in our prior client advisory, establishing a website (and now, social media outlets) as a “recognized channel of distribution” may take time and concerted effort. Since 2008, we have not seen a widespread practice of companies relying solely on websites to disclose material nonpublic information. However, websites are frequently used simultaneously with more traditional Regulation FD-compliant methods such as press releases and Form 8-Ks, and we expect social media outlets to now become a more integral part of the disclosure regime rather than a less formal afterthought. Using social media also raises additional securities law concerns (for example, character limits) that need to be carefully considered along with the Regulation FD analysis. Every Regulation FD analysis is fact and circumstances specific. The 2008 guidance was meant to provide a meaningful factor-based approach to that analysis, given the ever-evolving channels of distributions available to public companies. The SEC encourages public companies to consult the 2008 guidance for additional assistance on how to best establish social media outlets as recognized channels of distribution. Finally, companies should review their disclosure policies to ensure they accurately address how each company intends to utilize social media.