Yesterday, the Securities and Exchange Commission issued a release and report of investigation announcing that issuers can use social media outlets, such as Facebook and Twitter, to disclose material information in compliance with Regulation FD, so long as investors have been alerted in advance about which social media will be used by the issuer to disseminate such information.
In issuing the Release and Report, the SEC clarified its position regarding its investigation of whether Netflix, Inc. and its CEO, Reed Hastings, violated Regulation FD and Section 13(a) of the Exchange Act when Hastings used his personal Facebook page to announce that Netflix had streamed 1 billion hours of content in June 2012 – information that Netflix had not previously disclosed to the public. Neither Hastings nor Netflix had previously used Hastings's personal Facebook page to announce company metrics, and Netflix had not previously informed shareholders that Hastings' personal Facebook page would be used to disclose information about Netflix. 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. However, as noted in our prior blog post regarding the Wells notices issued to Hastings and Netflix, Hastings did have more than 200,000 Facebook subscribers, and many news outlets quickly reported on the Hastings' Facebook post.
As noted in the Report, the SEC determined not to pursue an enforcement action in this matter. The Report confirms that, in the SEC's view, Regulation FD applies to social media and other emerging means of communication in the same way that it applies to company websites. Reflecting on its 2008 "Guidance on the Use of Company Web Sites," Securities Exchange Act Release 34-52588, the SEC at least clarified that the 2008 Guidance applies to the use of social media and further stated that, while company communications made through social media channels could constitute selective disclosure in violation of Regulation FD, social media channels can also serve as effective means for disseminating information to investors "if they've been made aware that's where to look for it."
The SEC explained that, for purposes of complying with Regulation FD in the social media context, the SEC will take the position that a company makes public disclosure "designed to provide broad, non-exclusionary distribution" when the company distributes information "through a recognized channel of distribution." The SEC further explained that whether a company's site of disclosure is a recognized channel of distribution will depend on the steps that the company has taken to alert the market to its disclosure site and its disclosure practices. In evaluating a Regulation FD inquiry, the SEC will focus on "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." In our view, this clarification from the SEC was merely a common sense extension of its pre-existing position regarding company websites and in any event continues to require companies to make potentially difficult determinations regarding channels of distribution, including the extent to which information posted is regularly picked up by the market and readily available media.
Takeaways. Issuers that choose to utilize social media channels should (1) provide disclosures in their periodic reports, press releases and on their corporate web site that the company routinely posts important information on that website or through the identified social medial channel(s), (2) identify the specific social media channel(s) a company intends to use for the dissemination of material non-public information that 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, (3) consistently utilize the identified channel(s) as the source of the disclosure of important information to the investing public, and (4) analyze the requirements of the 2008 Guidance regarding the characteristics of a recognized channel of distribution. Without such advance notice to investors that the particular site(s) may be used for this purpose, the SEC states that it 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.
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