The SEC tiptoed into the twenty-first century as the agency validated the use of social media sites in certain situations for disclosure of information by publicly traded companies. This social media disclosure is subject to some constraints, but it is a positive move for public companies, shareholders and potential investors who are social media users.
The SEC demonstrated its resistance to the disclosure of information in a social media post at the end of 2012. As I discussed in a prior blog post, the SEC informed Netflix, Inc. and its CEO, Reed Hastings, that it might institute actions against them for violations of Regulation FD in connection with some information that Mr. Hastings had posted on his personal Facebook page. This Facebook post congratulated a Netflix marketing team for achieving a positive performance metric. The post was short and very specific, and it did not contain any other references or information. Netflix did not issue a press release and did not file a Form 8-K or any other disclosure document at that time regarding the information contained in this Facebook post. The company also did not post any information related to Mr. Hastings’ Facebook post on its website or on its corporate Facebook page.
The SEC alleged that Mr. Hastings’ Facebook post may have violated Regulation FD, which generally requires a company to disclose material information to all investors at the same time, so that no investor is disadvantaged by learning about such information later. At the time of the post, Mr. Hastings had over 200,000 Facebook friends. His post was also picked up and published in blogs and news outlets. Mr. Hastings and Netflix expressed the view that the language contained in Mr. Hastings’ post was not selective disclosure because of the wide distribution of this information both through Mr. Hastings’ Facebook network and the republishing of this information by other social media and news outlets. They also took the position that the information disclosed was not material. Netflix eventually disclosed these events and the possible SEC actions in a Form 8-K filed on December 5, 2012, and Mr. Hastings commented on them on his personal Facebook page.
The SEC then conducted an investigation of Mr. Hastings’ actions and their impact on Netflix and its investors. The results of this investigation were made public in Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, Release No. 69279 (April 2, 2013) and a related SEC press release. In a somewhat surprising move, the SEC partially relaxed its position on disclosure via social media channels. The Report said that, within certain constraints, public companies can treat social media channels as legitimate outlets for corporate disclosure. The key to the legitimacy of using a social media channel for public company disclosure is that investors must generally be aware that the company is using the channel to disclose information. The SEC also stated that it would not pursue an enforcement action against Netflix or Mr. Hastings in this matter.
The SEC’s position on the use of social media is grounded in traditional Regulation FD concepts. The SEC makes it very clear in the Release that the basic premises of Regulation FD are still in place and that public companies must still comply with them. It is also clear from the report that there are few, if any, hard and fast rules for the application of Regulation FD in this situation. Instead, the SEC will review pertinent facts and circumstances in reviewing and evaluating whether a company’s disclosure violates Regulation FD. This is true for social media disclosures, but is equally true for disclosures made through any medium.
The Release and the SEC press release confirm that a critical component of acceptable social media disclosure is whether investors, the market and the media are aware of the manner in which a company is going to disclose material information. The SEC’s evaluation of disclosure will be based on the specific facts and circumstances of each particular situation. The SEC made it clear that, while social media outlets may be acceptable methods of disclosure, the company must make investors, the market and the media aware of the channels of information distribution that the company will use so that these parties will be able to know where to go to obtain timely disclosure. This dissemination of the channels that the company will use must be done in advance so that these parties will know where to go to access material information.
The SEC specifically warned that disclosure of material information on a personal social media site of an individual corporate officer is unlikely to qualify as an acceptable method of disclosure without appropriate advance notice to investors that the site will be used for such disclosure. It also said in its press release that “[p]ersonal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information.” Company executives should be very careful in the use of their individual social media sites for disclosure of material information given this cautionary language.
The SEC’s conclusions and actions regarding social media disclosure were not uniformly praised. Some commentators feel that disclosure made strictly through a social media outlet will not be sufficient to reach all investors, resulting in inconsistent disclosure and a potential violation of the spirit of Regulation FD. The basis behind this contention is that not everyone is comfortable with or even aware of the use of social media, and these individuals will not have access to material information disclosed through social media at the same time that other individuals who use social media gain such access. This could result in an unfair advantage for social media users, which is exactly what some commentators believe Regulation FD was meant to avoid.
It was initially difficult for me to understand this criticism as I am an active social media user (and thus very comfortable with individual and corporate social media postings). Isn’t everyone an avid social media user now? As I thought about it, however, I believe that these critics raise some potentially valid issues. If I step back and look at all investors, it is clear that not everyone has the same comfort level with social media and that there is still a significant group of people who are not regular social media users and who are not comfortable with using social media. It is possible that these people could be disadvantaged by not having timely access to information disclosed solely through social media channels. See Dan Primack’s post on this topic in which he proposes a “central repository” of disclosure information (including information disclosed through social media) in a locations such as the investor relations page of a company’s website as a solution to this selective disclosure problem. Dan’s post and his prior critical comments on the Netflix/Hastings situation provide a thoughtful counterpoint to the SEC’s analysis and actions in the Release. It is also true, however, that the original intent of Regulation FD was not to ensure that each investor had the ability to access the information (Do average investors go to EDGAR and read Form 8-Ks?). Rather the original intent (at least according to the final rule release) was to curb the perceived wrong that was occurring when selective disclosure was given to analysts and institutional investors, but not to average investors.
Companies that are considering disclosure of information through non-traditional channels such as social media should carefully evaluate the Release and the SEC press release. Companies should also review the SEC’s guidance on disclosure of information in a company website (Commission Guidance on the Use of Company Web Sites, Release No. 34-58288 (Aug. 7, 2008)), which is specifically referenced in the Release. This guidance was released in 2008 but it still provides valuable input regarding disclosure on company websites and the SEC’s thoughts on the use of Internet-related disclosure methods. In evaluating the disclosure of material nonpublic information through a social media site, a company should identify and analyze all relevant facts and circumstances as well as its compliance with the “prior notification” standard discussed above.
Companies should also be aware that while the SEC has softened its stance on social media disclosure, this is still a very new area and I expect a number of changes and adjustments as it develops. The SEC’s new position on social media will be very positive, but companies should use caution for now. I would recommend that issuers who want to use social media to post company news to find prominent ways to alert the investing public to their social media channels. I would also recommend limiting the number of channels (or disclosing the same material information simultaneously across all social media channels). Finally, given the uncertainty, I would recommend, at least for now, simultaneously filing a press release or Form 8-K with the material information disclosed in the social media channel.