SEC Embraces Modernity -- Sort Of

By Cydney Posner

Today, the SEC issued a report of investigation that clarifies that companies may use social media, such as Facebook and Twitter, to announce key information in compliance with Reg FD so long as investors have been appropriately alerted about which social media will be used to disseminate information.  View the press release here.  Additionally, the Wall Street Journal published an article on this issue.

The press release makes clear that the SEC's 2008 Guidance on the Use of Company Websites (see News Brief dated 8/11/08) applies to "social media and other emerging means of communication used by public companies the same way it applies to company websites." That is, the social media must be "recognized channels of distribution" for the company. The SEC's Acting Director of Corp Fin is quoted in the press release as urging companies to "review the Commission's existing guidance — it is flexible enough to address questions that arise for companies that choose to communicate through social media, and the guidance does so in a straightforward manner."

So you goofy kids, all this time you could have been disclosing all kinds of information on Facebook and Twitter if only you had followed the 2008 Guidance.  So far, however, very few companies have relied on the 2008 Guidance even to make announcements solely through their company websites, that is, without also issuing a press release or filing an 8-K. One impediment has been the SEC's point in the 2008 Guidance that companies needed to take into account the extent to which information posted on the website was regularly picked up by the market and reported in the media and whether the company was well followed by the market and the media, which would pick up and further distribute the disclosures it made on its website. Not a heavy emphasis on that point in this report. It will be interesting to see whether the report has the effect of encouraging more companies to use social media more often and filing fewer 8-Ks.

The report arises out of the SEC's kerfuffle with Netflix' CEO, Reed Hastings, who announced some allegedly material information via a personal Facebook post.  (See News Brief dated 12/06/12.) The SEC issued a Wells Notice, raising concerns regarding potential FD violations. The SEC argued that neither the CEO nor Netflix had previously used his Facebook page to announce company metrics, nor had they taken steps to alert investors that his Facebook page might be used as a medium for communicating information about Netflix. However, the SEC let them off the hook this time. According to the press release, the "SEC did not initiate an enforcement action or allege wrongdoing by Hastings or Netflix. Recognizing that there has been market uncertainty about the application of Regulation FD to social media, the SEC issued the report of investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934. The report of investigation explains that although every case must be evaluated on its own facts, disclosure 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 an acceptable method of disclosure under the securities laws. 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."

The report stresses that the SEC's 2008 Guidance, although "directed primarily at the use of issuer web sites as a method of disseminating information…. also contemplated other ‘push' technology forms of communication such as email alerts and RSS feeds, along with ‘interactive' communication tools such as blogs….Accordingly, the guidance provided issuers with a factor-based framework for analysis, rather than static rules applicable only to web sites." The report describes the  2008 Guidance as offering "a non-exhaustive list of factors to be considered in evaluating whether a corporate web site constitutes a recognized channel of distribution. 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 advises that the staff does "not wish to inhibit the content, form, or forum of any such disclosure, and we are mindful of placing additional compliance burdens on issuers. In fact, we encourage companies to seek out new forms of communication to better connect with shareholders….We take this opportunity to clarify and amplify two points. First, issuer communications through social media channels require careful Regulation FD analysis comparable to communications through more traditional channels. Second, the principles outlined in the 2008 Guidance — and specifically the concept that the investing public should be alerted to the channels of distribution a company will use to disseminate material information — apply with equal force to corporate disclosures made through social media channels."

The report continues: "Specifically, in light of the direct and immediate communication from issuers to investors that is now possible through social media channels, such as Facebook and Twitter, we expect issuers to examine rigorously the factors indicating whether a particular channel is a ‘recognized channel of distribution' for communicating with their investors. We emphasize for issuers that the steps taken to alert the market about which forms of communication a company intends to use for the dissemination of material, non-public information, including the social media channels that may be used and the types of information that may be disclosed through these channels, are critical to the fair and efficient disclosure of information. Without such notice, the investing public would be forced to keep pace with a changing and expanding universe of potential disclosure channels, a virtually impossible task. [emphasis added]

"Providing appropriate notice to investors of the specific channels a company will use for the dissemination of material, nonpublic information is a sensible and expedient solution. It is not expected that this step would limit the channels of communication a company could use after appropriate notice or the opportunity for a company and investors to benefit from technological innovation and changes in communications practices. The 2008 Guidance encourages issuers to consider including in periodic reports and press releases the corporate web site address and disclosures that the company routinely posts important information on that web site. Similarly, disclosures on corporate web sites identifying the specific social media channels a company intends to use for the dissemination of material non-public information would give investors and the markets the opportunity to take the steps necessary to be in a position to receive important disclosures —e.g., subscribing, joining, registering, or reviewing that particular channel. These are some, but certainly not all, of the methods a company could use, with minimal burden, to enable evolving social media channels of corporate disclosure to be used as recognized channels of distribution in compliance with Regulation FD and the 2008 Guidance."

As for Netflix and its CEO, while "every case must be evaluated on its own facts, disclosure 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."

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