Corporate Disclosure Enters the Social Media Age With SEC's Blessing
The National Law Journal
Companies can use social media like Facebook and Twitter to disclose important business information, but they need to make sure in advance that investors know where to look, the U.S. Securities and Exchange Commission concluded in a report issued this week.
The report was prompted by an SEC investigation of Netflix chief executive officer Reed Hastings, who on July 3, 2012, wrote on his personal Facebook page, "Congrats to Ted Sarados, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June."
The problem: Netflix did not report this information to investors through a press release or via a Form 8-K filing with the SEC, nor was it mentioned in a company press release issued later that day. Instead, it trickled out, first reported by a blogger, then the financial press and analysts. Netflix stock rose from $70.45 at the time of the Facebook post to $81.72 at the close of the following trading day.
The SEC declined to pursue charges against Hastings, but it did offer more clarity on how companies canand can'tuse social media to communicate.
"One set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information," George Canellos, acting director of the SEC's enforcement division, said in a news release. "Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don't know that's where they need to turn to get the latest news."
The key to compliance is Regulation FD, which "requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time," according to the SEC.
In 2008, the SEC issued guidance on distributing information using a company's website, including how to tell if the website is a "recognized channel of distribution" for information. "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," the SEC found.
The same principles apply to social media. The SEC noted: "Neither Hastings nor Netflix had previously used Hastings's Facebook page to announce company metrics. Nor had they taken any steps to make the investing public aware that Hastings's personal Facebook page might be used as a medium for communicating information about Netflix."
According to the SEC, Hastings made the post without consulting the company's legal department, chief financial officer or investor relations department.
Still, the SEC said its goal was not to place "additional compliance burdens on issuers. In fact, we encourage companies to seek out new forms of communication to better connect with shareholders."
What companies need to do is alert investors how they'll be giving out key information, perhaps by issuing a press release or posting a notice on the corporate website. "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," the SEC found.
This article originally appeared in The National Law Journal.