The SEC has confirmed that public companies can use social media outlets like Facebook and Twitter to disseminate material information, provided that investors are alerted in advance that information will be disclosed in this fashion.
This guidance came in a Report of Investigation under Section 21(a) of the Securities and Exchange Act of 1934, issued on April 2, 2013. The underlying investigation concerned Netflix, Inc., and its CEO Reed Hastings. Last July, Hastings announced on his personal Facebook page that June 2012 marked the first month that Netflix had streamed more than one billion hours of content. No press release or Current Report on Form 8-K accompanied the Facebook post. Despite prior announcements that it was nearing a billion hours of monthly streamed content and the fact that its revenue model is subscription-based, the price of Netflix common stock increased 16% over the next trading day.
While the SEC opted not to pursue an enforcement action against Netflix and Hastings, its Report clarified two important points. First, a company’s communications through social media channels must pass muster under Regulation Fair Disclosure (Regulation FD). Regulation FD prohibits the selective disclosure of material, non-public information to certain covered persons like shareholders and securities professionals. Such information must instead be disclosed publicly through a Current Report on Form 8-K or disseminated in a manner “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” The SEC’s Report confirmed that any disclosure to a group that contains a Regulation FD covered person, including any disclosure through social media, should be analyzed for compliance with this requirement.
Second, the framework established in the SEC’s 2008 Guidance on the Use of Company Web Sites should be used to evaluate disclosures through social media. Critical to this inquiry is whether a company takes steps to alert the market about how it intends to communicate material, non-public information. This advance notice should identify the disclosure channel and the type of content to be distributed through the channel.
Notably, although the Report did not comment on the merits of Hastings’s Facebook post, the SEC observed that it investors are unlikely to look to personal social media sites of executives unless the company had announced in advance that material, non-public information would be disclosed in this manner. Without such a notice, the SEC and its staff are not apt to view an executive’s social media disclosure as complaint with Regulation FD, regardless of the size of the executive’s audience. (Hastings’ page had more than 200,000 subscribers.)
In response to the SEC Report, on April 10, 2013, Netflix filed a Current Report on Form 8-K with the SEC stating that it would continue to use social media, including two blogs, a Facebook and Twitter page, and its CEO’s public Facebook page, to communicate with subscribers and the public. Netflix further advised that interested parties should review the information posted on these social media sites.
For further discussion of this topic, including steps a public company should consider to ensure its social-media disclosures comply with Regulation FD, consult the Covington E-Alert “SEC Endorses Social Media as Public Disclosure Channel.”