The Securities and Exchange Commission ("Commission" or "SEC") recently stepped into the social media age with its April 2, 2013 Report of Investigation pursuant to 21(a) of the Securities Exchange Act of 1934 concerning a Facebook posting by Netflix CEO Reed Hastings.1 In the Report, the Commission stated that public companies may use social media to disclose material information to the public, provided that certain requirements are met. The Commission's embrace of new methods of communications is a positive development, but the Report left several unanswered questions about how Regulation FD will apply to disclosures made via social media.
Regulation FD and the Commission's 2008 Guidance on Disclosures via Company Websites
In 2000, the Commission adopted Regulation FD (short for "fair disclosure") to address its concerns about selective disclosures by company executives to favored analysts or investors.2 In general, Regulation FD mandates that companies distribute material information in a way reasonably designed to provide the information to the public in a broad and non-exclusive manner. It also is intended to ensure that all investors have the means to access simultaneously any material information released by the company. Regulation FD applies whenever an issuer discloses material, non-public information to: (1) a broker or dealer or associated persons, (2) an investment advisor or associated persons, (3) an investment company or associated persons, or (4) a holder of the issuer's securities under circumstances where it is reasonably foreseeable that the person will trade on the basis of the information.3 In all situations meeting these criteria, including when the issuer makes a disclosure to a selective group that includes persons both within and outside the groups identified in the regulation, the issuer either must file a Form 8-K or disclose the information in a manner "reasonably designed to provide broad, non-exclusionary distribution of the information to the public."4 According to subsequent guidance, however, Regulation FD "does not require use of a particular method, or establish a 'one size fits all' standard for disclosure."5
The Commission previously has faced the issue of how to interpret Regulation FD in light of evolving channels of communication. In 2008, the Commission issued guidance regarding the application of Regulation FD to disclosures made through a company's website.6 In its 2008 guidance, the Commission recognized the importance of the internet in the dissemination of information to investors, and the Commission provided some general information to assist issuers.
The Commission explained in 2008 that disclosures made via company websites can satisfy Regulation FD depending on the facts and circumstances that determine whether the disclosure is public. In evaluating whether a website disclosure is "public" for purposes of Regulation FD, the Commission instructed issuers to consider "whether and when: (1) a company's website is a recognized channel of distribution, (2) posting of information on a company website disseminates the information in a manner making it available to the securities marketplace in general, and (3) there has been a reasonable waiting period for investors and the market to react to the posted information."7 The first element of this analysis turns on several factors, including the steps the company has taken to publicize its website and the amount of traffic to the website.8 The second element of the analysis turns on how the information is posted to the company website and whether investors have easy and timely access to the website.9 For example, by what means has the issuer publicized that disclosures will be made on its website? How prominently are the disclosures displayed on the issuer's website? Do the media regularly report on information posted on the issuer's website?10 With respect to the third element, the analysis considers whether the company took additional steps to alert investors that important information would be posted on its website.11
Court Decisions Addressing Public Disclosure
Courts have recognized both the Commission's view and a second view for determining when information has been made "public."12 This second theory for when information becomes public provides that information is public when trading has caused the "information to be fully impounded into the price of the particular stock."13 Unlike the Commission's theory, which looks at how broadly information has been disseminated to determine whether the information is public, the second theory looks at how quickly the stock price reacts to the information. The Second Circuit explained this theory in United States v. Libera:
"[I]nformation may be considered public for Section 10(b) purposes even though there has been no public announcement and only a small number of people know of it. The issue is not the number of people who possess it but whether their trading has caused the information to be fully impounded into the price of the particular stock. Once the information is fully impounded into the price, such information can no longer be misused by trading because no further profit can be made."14
Information that is released to the public through various forms of electronic media, such as blogs, social media websites like Facebook and Twitter, and professional networking websites, such as LinkedIn, Plaxo and Chamber, might be evaluated under this theory - i.e., not by the method of dissemination but by how quickly the market reacts to that information.
The SEC's April 2, 2013 Report of Investigation regarding Netflix
On April 2, 2013, the Commission issued a Report of Investigation concerning a post made by Netflix CEO Reed Hastings on his personal Facebook page indicating that Netflix's monthly online viewing recently had exceeded one billion hours for the first time.15 CEO Hastings' post ignited a rally in Netflix's stock price from $70.45 at the time of the post to $81.72 at the close of the following trading day. The information in the CEO's post was not included in a company press release of the same day or in a Form 8-K. Previously, Hastings had never used his personal Facebook page to announce material company information, and Netflix had not informed investors that the CEO's personal Facebook page could contain company information. A few months after this initial post, CEO Hastings publicly commented that "we [Netflix] don't currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings."16
Ultimately, the SEC did not bring an enforcement action or allege wrongdoing by Hastings or Netflix. The SEC's Report of Investigation recognized the historical uncertainty about the treatment of social media as it relates to the requirements of Regulation FD and provided new direction as to how the Commission will evaluate disclosures made via social media. The Commission stated that all of the principles set forth in its 2008 Guidance "apply with equal force to corporate disclosures made through social media channels."17 The Commission explained that while communications via social media can satisfy Regulation FD, the issuer must consider whether the material information is being disseminated in a way "reasonably designed to provide broad non-exclusionary distribution of the information to the public."18 The Commission stated that the issuer must evaluate whether the particular social media outlet of choice is a recognized channel of distribution for communicating with potential investors and the issuer must consider whether appropriate notice of the use of social media for the dissemination of material information has been provided to investors.
In applying these factors to CEO Hastings' post, the Commission found that Hastings' use of his personal Facebook account, without advance notice, was not consistent with Regulation FD notwithstanding his large group of followers. But due to uncertainty in the law, the Commission opted to issue this much-needed guidance instead of bringing an enforcement action.19
Challenges Going Forward
It is encouraging that the Commission attempted to address the challenges posed by the application of Regulation FD to social media. Unfortunately, by largely referring back to its 2008 guidance, the Commission failed to address many of the unique challenges posed by social media. Consider these examples:
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Can a disclosure be "public" if investors have to sign an agreement and provide personal information to a third party before they can view the disclosure? A large portion of social media can be accessed only if the viewer has an account on the platform.
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Will the Commission expect issuers to research their Twitter followers and Facebook fans? Absent such research, it may be difficult for a company to know whether statements made on those platforms are reaching one of the four classes of people that trigger Regulation FD.
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What steps should companies take to enhance their social media presence so that disclosures made via social media are more likely to satisfy Regulation FD? Does the number of "followers" matter?
These questions illustrate that the Commission still has many decisions to make with respect to its enforcement of Regulation FD in the context of social media. Until the Commission makes those judgments, companies and executives will need to consider carefully what statements are made using social media.
1 Section 21(a) of the Exchange Act authorizes the Commission to investigate violations of federal securities law, and in the Commission's discretion, "to publish information concerning any such violations."
2 See 17 C.F.R. § 243.100 Final Rule: Selective Disclosure and Insider Trading, Exchange Act, Release No. 34-43154, 65 Fed. Reg. 51,716 (Aug. 15, 2000).
3 17 C.F.R. §243.100(a), (b).
4 17 C.F.R. §243.100(e)(1)-(2).
5 Final Rule: Selective Disclosure and Insider Trading, Exchange Act, Release No. 34-43154, 65 Fed. Reg. 51, 724.
6 See Commission Guidance on the Use of Company Web Sites, Release No. 34-58288 (Aug. 7, 2008) (the "2008 Guidance").
7 Id. at 18.
8 Id. at 18-19.
9 Id. at 19.
10 Id. at 19-22.
11 Id. at 23.
12 Bradley Bondi and Steven Lofchie, The Law of Insider Trading: Legal Theories, Common Defenses, and Best Practices for Ensuring Compliance, 8 N.Y.U. J. L. & Bus. 151, 171 (2012) (providing a detailed discussion of when information becomes "public" and the ramifications under insider trading law).
13 United States v. Libera, 989 F.2d 596, 601 (2d Cir. 1993).
14 Id.
15 See www.sec.gov/litigation/investreport/34-69279.pdf.
16 See id. at 5.
17 Id. at 5.
18 17 C.F.R. § 243.100(e)(1)-(2).
19 A court may have rejected an enforcement action under the facts. CEO Hastings had a substantial number of followers on his Facebook page, and the information he posted seemed to have spread quickly through the internet.
