Be Careful What You Wish For: SEC Permits Company Disclosures Via Social Media If Regulation FD Requirements Are Met

Last week, the Securities and Exchange Commission issued a report1 clarifying that companies can use social media channels, such as Facebook and Twitter, to disseminate material nonpublic company information under Regulation Fair Disclosure, more commonly known as “Regulation FD,” as long as investors have been made aware of and have access to the channels that will be used to distribute such information.
Background
The SEC issued the report following an SEC Division of Enforcement investigation of on-line entertainment service Netflix, Inc., regarding a July 2012 post on the personal Facebook page of its CEO, Reed Hastings. In the post, Hastings congratulated his Netflix team for exceeding one billion Internet viewing hours in a single month, which represented a fifty percent increase in viewing since the last time the company had released viewing numbers. Netflix did not follow up and report the increase in a press release or on a Form 8-K filing or its company website. Its stock increased from $70.45 at the time of the post to $81.72 at the close of trading the next day. Neither Netflix nor Hastings had previously used Hastings’ personal Facebook page to announce company metrics and no steps were taken to alert the public that such a channel might be used.
The SEC investigation focused on whether Netflix or Hastings had violated Regulation FD and Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which prohibit public companies, or persons acting on their behalf, from selectively disclosing material, nonpublic information to certain securities professionals or shareholders where it is reasonably foreseeable that they will trade on the information, before it is made available to the general public. Because Regulation FD is designed to prevent one set of shareholders or analysts having an advantage due to selective disclosures, companies must alert the public as to which channels they intend to use to communicate material information, which historically has been done through publicly available outlets such as press releases and Form 8-K filings.
Social Media Use Subject to Regulation FD Analysis
The SEC decided not to pursue an enforcement action in the Netflix matter. However, in the report, the SEC took the opportunity to clarify for issuers its position on social media as a tool to disseminate nonpublic information under Regulation FD and related guidelines issued in 2008 regarding the use of company websites2. The SEC stated that, as with company websites, it values the prevalence of social media channels in company communications and does not want to inhibit their use. Nonetheless, the report alerts companies that disclosures using social media channels must also be subject to careful and case-by-case Regulation FD analysis. The key focus, the SEC said, “is whether the company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information.”
Although the SEC validated the use of social media as an outlet for sharing material company information in the report, companies still must satisfy Regulation FD by making clear which Twitter feeds, Facebook pages or similar forms of social media will serve as prospective channels for announcements. Significantly, the SEC made it clear that distributing information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for disclosure of material, nonpublic information, is unlikely to satisfy Regulation FD, even if the officer has a large number of followers on the social media site, because, absent such notice, such disclosures would not satisfy the public disclosure required under Regulation FD.
Company Considerations
The SEC report encourages companies to include in their periodic reports and press releases the company website address and to disclose that the company intends to post important information on its website. Companies also can use their corporate websites to identify which social media outlets they plan to utilize for disseminating material nonpublic information. This allows investors to take steps to be in a position to receive important company information, either through subscribing, joining, registering or following that particular social media channel. The SEC’s guidance now allows corporate officers the opportunity to use their own personal social media sites to disseminate company information or to decide only to utilize an official company social media site, so long as all outlets have been disclosed to the public as potential sources for important company information.
1 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings (April 2, 2013), available at: http://www.sec.gov/litigation/investreport/34-69279.pdf; a related press release can be found at: http://www.sec.gov/news/press/2013/2013-51.htm. More information on Regulation FD can be found at: http://www.sec.gov/answers/regfd.htm.
2 Commission Guidance on the Use of Company Web Sites, Release No. 34-58288 (August 7, 2008), which can be found at: http://www.sec.gov/rules/interp/2008/34-58288.pdf. Our client alert regarding the SEC’s 2008 guidelines can be found at: http://www.wcsr.com/resources/pdfs/cs080608.pdf.
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