Co-authored by: Jonathan Nowakowski
Recognizing the reality that many investors likely get more information from Facebook and Twitter than a corporate 10-K and that most public companies have a robust social media presence, the U.S. Securities and Exchange Commission (“SEC”) recently weighed in on the use of social media by public companies to disclose material nonpublic information to the general public. The SEC’s guidance was prompted by its investigation of Netflix and its CEO Reed Hastings, specifically Hastings’ post of material nonpublic information on his personal Facebook page in July 2012 concerning Netflix monthly viewing numbers. In its April 2, 2013, report and investigation of whether the post violated the SEC’s corporate disclosure rules and regulations (“April Netflix Report”), the SEC decided not to pursue an enforcement action against Netflix or Hastings and used the incident as an important teaching moment for public companies that may want to use social media to communicate material nonpublic information.
On July 3, 2012, Hastings posted the following message to his personal Facebook page with over 200,000 followers:
“Congrats to Ted Sarados, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow those records away. Keep going, Ted, we need even more!”
While the congratulatory post may have seemed harmless at the time, Netflix did not file a Form 8-K with the SEC, issue a formal press release, or post the information on Netflix’s webpage – the typical avenues for announcing material nonpublic information. Neither had Netflix previously alerted investors that Hasting’s Facebook page would be used to disclose material information about the company. Hasting’s Facebook post caught the SEC’s eye and in December 2012, the SEC notified Netflix and Hastings that it was considering an enforcement action against them for possibly violating Regulation Fair Disclosure (“Reg FD”).
A quick overview of Reg FD and the SEC’s Reg FD company website guidance: Reg FD requires that the disclosure of material nonpublic corporate information should be distributed in a broad and non-exclusionary manner to the public. Information is considered nonpublic if it has not been disseminated in a manner available to the public generally. Information is considered material if it is reasonably foreseeable that an investor would trade on the basis of that information. Reg FD was adopted to address the concern that issuers were selectively “disclosing important nonpublic information, such as advance warning of earnings results, to securities analysts or selected institutional investors before making full disclosure of the same information to the general public.” Public companies typically comply with Reg FD by disclosing material nonpublic information in SEC filings, through press releases, on the company website, or some combination of all three.
In August 2008, the SEC provided guidance on the disclosure of material nonpublic information via company websites, blogs, and other “push” technologies. 2008 Commission Guidance on the Use of Company Websites, Rel. No. 34-58288 (Aug. 7, 2008), (“2008 Guidance”). The 2008 Guidance explained that whether a company’s website or blog is a “recognized channel of distribution” passing muster under Reg FD depends on the “steps that the company has taken to alert the market to its website and its disclosure practices, as well as the use by investors and the market of the company’s website.” The 2008 Guidance non-exhaustive list of factors for companies to consider include, but are not limited to:
- whether and how the company lets investors and the market know that the company has a website and that they should look at the company’s website for information;
- whether the company has made investors and markets aware that it will post important information on its website and whether it has a pattern of doing so;
- whether the company’s website is designed to lead investors and the market efficiently to information about the company;
- the extent to which information posted on the website is regularly picked up by the market and media, and is reported;
- the steps taken by the company to make its website accessible; and
- the nature of the information being disclosed.
With respect to Hasting’s Facebook post, the SEC ultimately decided not to pursue enforcement proceedings against Netflix or Hastings, namely because the agency concluded that there was a great deal of uncertainty concerning how Reg FD applied to public disclosures via social media. In the April Netflix Report, the SEC made clear that the 2008 Guidance “provide[s] a relevant framework for applying Regulation FD to evolving social media channels of distribution” and applies with “equal force” to the use of social media to disclose material information. Accordingly, moving forward the SEC “expects issuers to examine rigorously the factors indicating whether a particular [social media] channel is a ‘recognized channel of distribution for communicating with their investors.” The SEC also emphasized that the “steps taken to alert the market about which forms of communication a company intends to use for the dissemination of material, nonpublic information, including social media channels … are critical to the fair and efficient disclosure of information.”
The April Nextflix Report encourages companies to consider using periodic reports, press releases, and corporate websites to identify specific social media platforms that the company intends to use as well as the types of information it plans to disclose through social media. Further, while the SEC did not go so far as to endorse Facebook and Twitter as recognized channels of distribution in the April Netflix Report, by referencing them as general examples of social media platforms, coupled with each having one billion and 200 million users respectively, it is likely that the SEC would view both social media platforms as recognized channels of distribution so long as the public was adequately alerted of that intended use. Notably, the April Netflix Report found that personal social media sites of company employees – regardless of the amount of followers – would not ordinarily be assumed to be a proper channel for distribution without adequate notice that they will be used for that purpose.
Regulators are increasingly turning a critical eye toward companies’ use of social media from everything from advertising to financial disclosures. The April Netflix Report is the latest example of regulators wrestling with the new reality of social media as an information source for the general public and companies increasingly relying on this medium to communicate to investors and consumers. Public companies looking to social media as a possible means to disclose nonpublic material information should take heed of the SEC’s April Netflix Report and carefully consider the following steps:
- revisit and review the company’s existing Reg. FD policy;
- evaluate the selected social media platform(s) applying the 2008 Guidance factors summarized above;
- formulate a plan to alert the public of the social media platforms it intends to use and for what purpose through, among other things, its corporate website, periodic reports filed with the SEC and through formal press releases, and do so over an extended period of time with a specific date given for when the company will begin posting material information via the social media platform(s) that the company ultimately chooses;
- develop a coordinated plan to use designated social media platforms as part of the company’s investor communications along with more traditional venues such as SEC filings, press releases and the company’s website;
- review and revise electronic communications policies and train employees on the potential consequences of disclosing material nonpublic information on social media;
- coordinate legal, compliance, and investor relations departments to work together to implement and enforce electronic communications policies as well as review all social media content before it is posted; and
- ensure compliance with the laundry list of potentially applicable securities laws, which are beyond the scope of this blog, e.g., compliance with antifraud and proxy solicitation regulations, among others.