SEC Issues Guidance on Use of Social Media to Communicate with Shareholders & the Market
May 9, 2013
On April 2, 2013, the SEC issued a report of an investigation it conducted that provides guidance regarding a public company’s use of social media to communicate with its shareholders and the media.
The report followed an investigation by the SEC’s Division of Enforcement pursuant to Section 21(a) of the Securities Exchange Act of 1934 of disclosure, in July 2012, by Reed Hastings, CEO of Netflix, on his personal Facebook page that Netflix had streamed 1 billion hours of content in the month of June 2012. Neither Mr. Hastings nor Netflix had previously used Mr. Hasting’s Facebook page to announce company metrics and
Netflix had not previously informed shareholders that Mr. Hasting’s Facebook page would be used to disclose information about Netflix.
Moreover, the post was not accompanied by a press release, a post on Netflix’s own web site or Facebook page, or a Form 8-K.
The investigation raised questions regarding the application of Regulation FD and the SEC’s 2008 Guidance on the Use of Company Web Sites (“2008 Guidance”) to Mr. Hasting’s Facebook post.
Regulation FD, adopted by the SEC in August 2000, prohibits selective disclosure between public companies and market professionals and stockholders and is intended to provide full and fair disclosure of material non-public information to the investing public.
Regulation FD prohibits selective disclosure to certain “enumerated persons,” including broker-dealers and their associated persons, investment advisers, institutional investment managers or their associated persons, investment companies or their affiliated persons, and security holders if it is reasonably foreseeable that the person will trade on the basis of that information.
Communications in the ordinary course of business with customers, suppliers or strategic partners, as well as communications with the press or news organizations, rating agencies, or the government, are not covered. Also, specifically excluded are disclosures made to:
a person who owes a duty of trust or confidence to the company (such as an attorney, accountant, or investment banker)
a person who has expressly agreed to keep the information confidential
an entity whose primary business is the issuance of credit ratings, provided the information is disclosed solely for the purpose of developing a credit rating and the company’s credit rating is publicly available, or
generally in the context of a registered public offering
The SEC’s 2008 guidance addressed whether and when information posted on a company web site is “public” so that subsequent disclosure of that information to an “enumerated person” under Regulation FD is not disclosure of non-public information.
The guidance directs companies, in evaluating whether information is public to consider whether and when:
a company web site is a recognized channel of distribution
posting of information to a company web site disseminates the information in a manner making 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 posted information
With regard to whether the company web site is a “recognized channel of distribution,” the SEC stated that it will depend on the steps the company has taken to alert the marketplace to its use of the web site and its disclosure practices, as well as the use by investors and the market of the web site. For this purpose, consideration should be given to whether the web site is a recognized channel of distribution and whether the information on the web site is “posted and accessible” and therefore “disseminated,” including:
whether and how a company lets investors know the company has a web site and that they should look at the web site for information (by, for example, including disclosure in its periodic reports, press releases, and the like of its web site address)
whether it has made investors aware that it will post important information on its web site and has a pattern and practice of doing so
whether the web site is designed to lead investors efficiently to information about the company
the extent to which information posted on the site is regularly picked up by the market and readily available media and reported in the media
the use of “push” technology to make the site accessible
whether the site is kept current
whether other methods of disseminating information predominate as the means of dissemination
the nature of the information.
With regard to the second element, in the context of web site disclosure by a company where investors know the web site is a location of company information, in analyzing the concept of “dissemination” for purposes of the “public” test, company’s should focus on:
the manner in which information is posted on a company web site and
the timely and ready accessibility of such information to investors and the markets
With regard to the third element, namely, evaluating whether and when information posted to a site is public for purposes of evaluating whether a subsequent selective disclosure may implicate Regulation FD a company should consider whether investors and the market have been afforded a reasonable waiting period to react to the information. This will depend on several factors including:
size and market following of the company
extent to which investor information on the site is regularly accessed
steps taken to inform investors that the company uses its web site as a key source of information
whether steps have been taken to actively disseminate the information or the availability of the information posted, and
the nature and complexity of the information
Although there is no bright line test, in the context of insider trading cases, courts have held that a 48 hour waiting period would suffice. Also, investors should be provided with advance notice of a posting if the information is important.
The SEC stated that, in the context of whether information posted on a company web site would be “public” so that subsequent selective disclosure would not implicate Regulation FD, for some companies the posting of information on a company web site may be a sufficient method of public disclosure under Rule 101(e) of Regulation FD after considering the factors discussed above.
SEC’s Report of Netflix Investigation
The SEC report stated that in July 2012, Mr. Hastings, CEO of Netflix, posted a message on his personal Facebook page to the effect that Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. This represented an approximately 50% increase in streaming hours from an announcement Netflix had made in January 2012.
Mr. Hasting did not receive any input from the company’s CFO, legal department, or investor relations department. Netflix did not file or furnish a Form 8-K Current Report, issue a press release, or otherwise make an announcement of the streaming milestone. A subsequent company earnings release did not mention the Facebook post. Netflix stock continued a rise that began when the market opened on July 3, increasing from $70.45 at the time of the post to $81.72 at the close on the following trading day.
Neither Mr. Hastings nor Netflix had previously used Mr. Hasting’s Facebook page to announce company metrics, had not taken any steps to make investors aware his Facebook page might be used as a medium for communicating information about Netflix. Mr. Hastings expressly stated in December 2012 that Netflix does not currently use Facebook and other social media to get material information to investors but uses investor letters, press releases and SEC filings.
In the report, the SEC advised that Regulation FD is implicated whenever an issuer, or any person acting on its behalf, discloses material, non-public information to certain enumerated persons and prohibits selective disclosure to enumerated persons. Issuer communications through social media should be given careful analysis under Regulation FD and that the principles outlined in the 2008 Guidance apply to corporate disclosures through social media channels.
The SEC stated that the principal factor in determining whether social media disclosure satisfies the requirement of Regulation FD is whether the particular channel is a “recognized channel of distribution.” Accordingly, a company should provide appropriate notice to investors of the specific channels it will use to disseminate material non-public information by posting disclosure on its corporate web site identifying specific social media channels the company intends to use for disseminating material non-public information.
The SEC stated that disclosure of material non-public 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 not likely 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. Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which a company would disclose material non-public information. Without adequate notice that such a site may be used for this purpose, investors would not have the opportunity to access this information or would not know of that opportunity at the same time as other investors.
The SEC’s report concluded by, among other things, stating that disclosure to persons enumerated in Regulation FD, even if through evolving social media channels, must still be analyzed for compliance with Regulation FD and that the SEC’s 2008 Guidance, although focused on web sites, is equally applicable to current evolving social media channels of corporate communications, including Facebook and Twitter.
Accordingly, issuers must take steps to sufficiently alert investors and the market to the channels it will use for disseminating material non-public information before it decides to use the channel.
What should a public company do now?
Companies should not start immediately utilizing social media for disseminating FD compliant material non-public information. However, a company wishing to use social media outlets to communicate information should consider what outlets are appropriate for the company and the industry in which it operates.
Among other things, a company should:
consider other disclosure requirements or implications, such as the requirement to file a Current Report on Form 8-K
decide what types of information to disclose via social media channels
notify investors and the markets of plans to disseminate information through a particular social media channel and provide a link to that channel through SEC filings, press releases and on the home page of the company’s web site
establish a pattern and practice of disclosing information via the chosen media channel
make the disclosure easy to read and access
update Regulation FD disclosure policies to encompass social media dissemination of information to assure compliance with the company’s disclosure controls and procedures
monitor usage by investors
adopt internal guidelines and procedures for use of social media by officers, directors and key employees
use “push” technology, by giving investors the ability to subscribe to RSS or other feeds and let investors know those feeds are available
once announced, use the channel for the purpose previously described
Using social media to communicate material non-public information is an evolving area and companies should carefully consider and analyze their use of such media in light of the SEC’s guidance, discussed above.
For more information, please contact:
Neil R.E. Carr
Direct Dial: +1 202 587 2983
Kathleen L. Cerveny
Direct Dial: +1 202 779 9507
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