SEC Gives Nod to Use of Social Media Under Regulation FD—If Done Correctly

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April 3, 2013

Regulation FD prohibits a public company from disclosing material nonpublic information to securities market professionals and securityholders unless the company simultaneously discloses the information publicly.

In a report issued April 2, the SEC confirmed something that its staff has been saying for years—public companies can use social media outlets such as Facebook and Twitter to disseminate information in a manner that satisfies Regulation FD, but only if that usage complies with the principles outlined by the SEC in its 2008 Guidance on the Use of Company Web Sites.

In its 2008 guidance, the SEC indicated that website posting may, in some circumstances, be adequate public disclosure under Regulation FD. The 2008 guidance, which yesterday’s report confirms is equally applicable to social media communications, states that, when evaluating whether a communication is sufficient under Regulation FD, a company must consider whether:

  • the communication is made via a recognized channel of distribution;
  • the means of communication disseminates the information in a manner that makes it available to the securities marketplace in general; and
  • there has been a reasonable waiting period for investors and the market to react to the information.

The required analysis must be made on a case-by-case basis. As noted in the report: “The central focus of this inquiry 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.” The report highlights some factors that may be especially relevant in the social media context, including providing appropriate notice to investors about:

  • the specific social media channels the company will use for the dissemination of information, so that investors are in a position to subscribe, join, register for or otherwise review those particular channels; and
  • the types of information that may be disclosed through these channels.

Companies should remain vigilant about dissemination of information through executives’ personal social media accounts, as the report warns that: “[D]isclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to qualify as a method ‘reasonably designed to provide broad, non-exclusionary distribution of the information to the public’ within the meaning of Regulation FD. This is true even if the individual in question has a large number of subscribers, friends, or other social media contacts, such that the information is likely to reach a broader audience over time. Personal 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. Without adequate notice that such a site may be used for this purpose, investors would not have an opportunity to access this information or, in some cases, would not know of that opportunity, at the same time as other investors.”

As indicated in the above quote, the report expressly rejected the idea that having a large number of followers, in and of itself, makes a forum FD-compliant. The report also makes clear the SEC’s view that a private communication is problematic if any member of the audience is in one of the groups of people covered by Regulation FD, regardless of how many other people receive that communication.

The report was issued by the SEC in conclusion of its enforcement staff’s investigation into whether Netflix’s CEO had violated Regulation FD by posting an updated corporate metric (that Netflix’s monthly online viewing had exceeded one billion hours for the first time) on his personal Facebook page, without simultaneously making any other disclosure of the metric. The report notes that neither Netflix nor its CEO had previously used the CEO’s personal Facebook page to announce company metrics, and that Netflix had not previously informed investors that the CEO’s personal page would be used to disclose information about Netflix. Instead, the report notes that Netflix had consistently directed the public to Netflix’s corporate website, Facebook page, Twitter feed and blog for information about Netflix. Stating that it recognized that there has been market uncertainty about the application of Regulation FD to social media, the SEC determined not to initiate an enforcement action or allege wrongdoing by Netflix or its CEO.

While the significance of the report may fall short of some of the headlines about it, the report reflects the SEC’s recognition of the increased use and importance of social media channels, as well as the SEC’s willingness to allow companies to explore new ways to communicate with investors. As a practical matter, however, the report does not immediately change the disclosure landscape in a revolutionary way. At least for now, as was the case before the report, most public companies (especially newly public ones) will continue to be best served by disseminating material information through a Form 8-K or press release, in addition to website posting, social media and other means of dissemination. However, with appropriate groundwork by companies based on the principles outlined in the SEC’s 2008 guidance, the report may in time live up to the excitement with which it has been greeted in many quarters.

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Topics:NewsRegulatory Developments