Public companies are increasingly using social media outlets, such as Facebook, LinkedIn and Twitter, to make important announcements. But these relatively new communication channels raise questions about compliance with Regulation FD, the SEC's "fair disclosure" regulation.
Regulation FD is intended to prevent public companies from favoring certain individuals or entities by providing them with important nonpublic information before sharing the information with the general public. Under the regulation, a company that discloses material nonpublic information to "certain enumerated persons" must also make public disclosure of the same information. Those persons include brokers, dealers, investment advisors, institutional investment managers and shareholders who are "likely to trade on the basis of the information."
Some disclosures are exempt from the rule, including discussions with customers, suppliers and those who are obliged to keep the information confidential, such as accountants, lawyers and bankers. If a selective disclosure is intentional, the public disclosure must occur simultaneously. If the selective disclosure is inadvertent, the public disclosure must be made "promptly." Generally, this means within 24 hours or, if later, before the next opening of the New York Stock Exchange.
Selective disclosures include disclosures to groups that include both enumerated and nonenumerated persons, if they fall short of "public disclosure." To ensure that a disclosure is "public," a company must include it on a Form 8-K filed with the SEC or use an alternative method "reasonably designed to provide broad, non-exclusionary distribution of the information to the public."
The SEC's social media guidance stems from an investigation of Netflix, the leading provider of online streaming media. In June 2012, Netflix surpassed one billion hours in monthly viewing for the first time. On July 3, 2012, the company's CEO, Reed Hastings, posted a message to his personal Facebook account congratulating his content licensing team on this achievement.
Netflix didn't disclose this information in a Form 8-K, press release or other standard distribution channel. The company issued a press release on the same day, announcing its second quarter earnings but saying nothing about the streaming milestone.
Hastings' Facebook post was picked up by a technology blog and Netflix sent it to several reporters, but the company didn't distribute the information to its broader mailing list for corporate press releases. Eventually, the mainstream financial press picked up the story and research analysts highlighted the streaming milestone. Meanwhile, Netflix's stock price rose from $70.45 when the market opened on July 3 to $81.72 at the close of the following trading day.
This incident marked the first time that Hastings or Netflix had used Hastings' personal Facebook page to make announcements about the company's performance.
The SEC said that a social media channel requires a more rigorous Regulation FD analysis than traditional vehicles to determine whether it's a "recognized channel of distribution" for communicating with the investing public. The concept of alerting investors to the distribution channels a company will use to disseminate material information is the same principle the SEC applies to company websites.
In the case of Netflix, the SEC observed that disclosures made on a corporate officer's personal social media site are unlikely to meet the requirements of Regulation FD without advance notice to investors.
Methods for alerting investors include identifying, in periodic reports and press releases, the specific social media channels the company will use to disseminate material nonpublic information. Companies should also consider listing these social media channels on their corporate websites.
To ensure that your company complies with fair disclosure rules, periodically review your Regulation FD policies and procedures. If your company or its officers use social media channels to communicate material information, take steps to inform the investing public about it.
If you have any questions about the content of this article, please contact Michele Amato at MAmato@FriedmanLLP.com.