The Securities and Exchange Commission (SEC) issued a report on April 2, 2013 concerning its investigation into the use of social media by public companies in the United States (Report).1 The Report confirms that a public company may use social media channels to disseminate material, nonpublic information to the public and still comply with Regulation FD if the company first takes appropriate steps to alert investors, the market, and the media of the channels it expects to use. The format and conclusions of the Report track an interpretive release published by the SEC in August of 2008 (2008 Guidance),2 which made clear that public companies can disseminate material, non-public information on their corporate websites and considered other means by which a company can distribute such information electronically without violating Regulation FD.3 The Report also follows a more recent SEC release, termed a Guidance Update, by the SEC’s Division of Investment Management.4 The Guidance Update addressed the use of social media by registered investment companies.5 The heightened interest in corporate communication through social media was confirmed yet again when, in response to the SEC’s Report, Bloomberg announced on April 7, 2013 that it would integrate real-time Twitter feeds into its platform for subscribers.
When an issuer discloses material, nonpublic information to certain securities professionals6 or to shareholders,7 Regulation FD requires the issuer to disseminate the material, nonpublic information using a method or combination of methods reasonably designed to provide broad, non-exclusionary distribution of such information to the public. If an issuer selectively discloses material, nonpublic information in an intentional way, then the issuer must simultaneously disseminate the same information to the public. If such a disclosure is not intentional, then the issuer must disseminate the same information promptly after the inadvertent disclosure.
As noted in the 2008 Guidance and the Report, the SEC has “long recognized the vital role of the Internet and electronic communications in modernizing the disclosure system under the federal securities laws and in promoting transparency, liquidity and efficiency in our trading markets.” The 2008 Guidance responded to the rapid evolution of electronic communications by instructing issuers on the use of company websites so as to ensure that they comply with Regulation FD. The SEC also provided a factor-based framework, enabling issuers to analyze whether their company websites are or should be a recognized channel of distribution and facilitating the distribution of information on company websites in compliance with Regulation FD. The 2008 Report asked public companies to focus on one key question when determining whether it was permissible to distribute material non-public information over their websites – namely, has the issuer alerted its investors, the market, and the media of the distribution channels it expects to use, so that the relevant parties know where to look for, or how to receive, disclosures of material, non-public information.
Prior to the Report, the SEC had not explicitly addressed the application of Regulation FD and the 2008 Guidance to disclosures using social media. In the Report, the SEC clearly explains that the factor-based framework established by the 2008 Guidance also applies to evolving social media channels of distribution, such as Facebook and Twitter. The SEC emphasizes that Regulation FD always requires an analysis of the relevant facts and circumstances to establish compliance with such regulation and that the SEC expects issuers to “examine rigorously the factors indicating whether a particular channel is a ‘recognized channel of distribution’ for communicating with their investors.” The SEC also emphasizes the critical importance of the advance steps taken by a company to alert relevant parties about the distribution channels it expects to use to disseminate material, non-public information. The SEC suggests that periodic reports and press releases, as well as company websites, may be used to identify the specific social media channels that a company intends to use, such that relevant parties may take the necessary steps to receive important disclosures (e.g., following a company Twitter feed).
Benefits and Potential Pitfalls for Issuers
An ability to communicate through social media channels will benefit issuers because it allows for quick and interactive communication with a large audience. Supporters of social media for corporate communication have pointed out that Facebook posts and Twitter tweets may be used to disseminate material, non-public information to a large audience even more quickly than would be the case with updates posted on company websites or filings through the SEC’s EDGAR system because social media channels are monitored constantly as a part of daily life.
While no one would dispute the efficiency of communicating through social media, we caution public companies to be mindful of potential pitfalls that may arise in communicating important announcements through social media channels. First, issuers need to consider when and how to incorporate appropriate legal disclaimers into announcements made through social media.8 From a practical standpoint, this issue is even more problematic for Twitter users, as tweets are limited to a maximum of 140 characters. One potential solution is to also publish a traditional press release containing appropriate legal disclaimers and include a link to that full press release in the tweet. This would permit issuers to enjoy the benefit of reaching a broad audience quickly through Twitter, but it would do so by adding to rather than replacing an existing method of communication by public companies.
Issuers planning to use social media to distribute material, non-public information should also develop or revisit their existing company social media policies and procedures and consider carefully:
whether to direct investors to official company-run social media channels only, or whether to also direct investors to the personal social media sites of individual executives; and
what steps the company should take to provide advance notice of which social media channels the company intends to use.
In making these decisions, issuers should remember that individuals tend to post on Facebook or tweet more impulsively than they otherwise would if using only a traditional method of communication. If individual executives plan to announce material, non-public information about the company through social media channels, then company policy should dictate specific procedures for doing so, much like those in place for issuing traditional press releases. If issuers do not plan to direct investors to the personal social media sites of individual executives, then company policy should include additional controls and procedures to quickly respond to situations when executives inadvertently disclose material, non-public information on a selective basis using their personal social media sites.
As new technology develops, most commentators expect demand for instantaneous communication to grow even stronger. The SEC and public companies will need to analyze whether the 2008 Guidance continues to provide a useful framework for companies as new communication methods are introduced. Now that the SEC has embraced social media to facilitate public company communications, we expect that the SEC will remain focused on enabling issuers to use new communication methods as they develop.
1 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings; Release No. 69279.
2 Commission Guidance on the use of Company Websites, Release Nos. 34-58288, IC-28351; File No. S7-23-08.
3 Detailed in DechertOnPoint, "SEC Issues Guidance on Use of Company Websites," (August 2008).
4 March 2013/No. 2013-01.
5 Detailed in DechertOnPoint, "SEC Division of Investment Management Issues Guidance on Filing Requirements for Social Media," (April 1, 2013).
6 Applicable securities professionals include (1) a broker or dealer, or a person associated with a broker or dealer; (2) an investment adviser, an institutional investment manager, or a person associated with either an investment adviser or institutional investment manager; or (3) an investment company or a person affiliated with an investment company. 17 CFR § 243.100(b)(1)(i)-(iii).