On April 2, 2013, the Securities and Exchange Commission said that public companies may generally use social media sites to disclose material, nonpublic information in compliance with Regulation FD so long as they notify the market in advance about which social media sites they will use to make these disclosures.1 In doing so, however, the SEC left the door open for future determinations that the use of social media sites could violate Regulation FD in some circumstances. As a result, public companies should still be cautious about the use of social media in communicating with the market and investors, especially if social media is used as an exclusive means for disseminating information.
In an ironic twist, the SEC made its announcement in connection with a decision not to pursue an enforcement action in a case where its own guidelines for disclosure—which were reiterated in the announcement—were not followed. The SEC stressed that there has been uncertainty in the market about how existing rules apply to social media, and its announcement was meant to remind companies that all corporate communications must comply with Regulation FD, including those that are made via social media. Accordingly, the SEC’s implicit message appears to be that similar violations of these guidelines may not be overlooked in the future.
The SEC’s Investigation of Netflix
The SEC’s acceptance of social media as a disclosure tool was released as part of its decision not to pursue an enforcement action against Netflix and its CEO, Reed Hastings. The SEC had explored taking action in connection with a post that Mr. Hastings made on his personal Facebook page announcing that Netflix had streamed one billion hours of content in the month of June 2012. As the information was picked up by other media sources, the market reacted favorably, and Netflix’s stock price increased in the days following the post.
In its announcement, the SEC cited a number of facts about the Netflix case that serve as a warning for public company executives disseminating material, nonpublic information. For example, the Netflix information had not been previously disclosed to the public and was not released via any other means, including by press release, a post on Netflix’s own website or Facebook page, or a Form 8-K, even though Netflix had disclosed earlier milestones in conventional manners. In addition, according to the SEC, the post had not been discussed with Netflix’s chief financial officer or its legal or investor relations departments. Perhaps most importantly, Netflix had not previously informed the market that Mr. Hastings’ personal Facebook page would be used to disseminate information about Netflix and it had not previously been used to announce company information.
The SEC’s Guidance on Disclosure via Social Media
Regulation FD2 prohibits the selective disclosure of material, nonpublic information by public companies to certain market participants. It requires companies to disclose material information in a manner designed to get the information out widely and to all investors at the same time. In August 2008, the SEC released its guidance on how companies may use corporate websites to disclose material information to the market in compliance with Regulation FD. The SEC’s most recent guidance clarifies that its 2008 guidance is equally applicable to social media sites and emphasized that, similar to websites, social media sites must be “recognized channels of distribution” in order for corporate communications via social media to comply with Regulation FD.
To establish a social media site as a recognized channel of distribution, a company must notify the public that it intends to disseminate material information through that particular channel. As an example, the SEC has encouraged companies to disclose in periodic reports and corporate websites that specific social media sites are used for this purpose—although it also noted that this is not the exclusive method for establishing a social media site as a recognized channel of distribution. In particular, smaller companies—with a smaller following in the marketplace—likely need to do more to alert the public in advance that they will be releasing material information by means of corporate websites or social media channels.
In its announcement, the SEC also singled out the practice of disclosing material, nonpublic information on the personal social media site of an individual corporate officer. It stated that the personal social media site of an individual employed by a company is unlikely to qualify as a recognized channel of distribution if the company does not provide advance notice to the public that it will be used to disclose material, nonpublic information about the company. This remains true even if the individual in question has a large number of subscribers, friends or other social media contacts. This specific example seems designed to directly rebut arguments made by Netflix and Mr. Hastings during the course of the SEC’s investigation and provides further evidence that the SEC may not be willing to forego pursuing similar actions in the future.
The SEC’s announcement is also notable for the things it did not say, and as a result, its permission to use social media under certain circumstances should not be viewed as carte blanche. For example, the SEC did not analyze the interaction between different media of communication, such as whether social media can be used to modify material information that was previously disclosed using conventional methods. As an illustration, if a company releases earnings guidance in a typical webcast earnings call, it is not clear that the company would comply with Regulation FD if it later modifies its guidance in a Facebook post, at least if it has not specifically signaled that possibility.
By acknowledging that social media can be a legitimate method for public companies to disclose material information, the SEC has also acknowledged the realities of the modern marketplace and the ways in which investors and the public obtain information. However, the SEC’s acceptance of social media is not unconditional and companies must continue to carefully scrutinize their external communications to ensure that they comply with Regulation FD.
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1Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934, Netflix, Inc., and Reed Hastings, Exchange Act Release No. 69279 (April 2, 2013), available at http://www.sec.gov/litigation/investreport/34-69279.pdf
217 C.F.R. §243.100 et seq.
3Commission Guidance on the Use of Company Web Sites, Release No. 34-58288 (Aug. 7, 2008), available at http://www.sec.gov/rules/interp/2008/34-58288.pdf.
This article was originally published by Bingham McCutchen LLP.