On April 2, 2013, the U.S. Securities and Exchange Commission issued a Report of Investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934, providing guidance under Regulation FD on the use of social media to disclose material, non-public information. The Report arose out of an investigation into whether Netflix, Inc., and its chief executive officer, Reed Hastings, violated Regulation FD and Section 13(a) of the Exchange Act when Mr. Hastings used his personal Facebook page on July 3, 2012 to announce that Netflix had streamed one billion hours of content in the month of June. Although the SEC did not bring an enforcement action against either Netflix or Mr. Hastings, it used the Report as a means to make clear that Regulation FD applies to disclosure of material, non-public information made through social media and other emerging forms of communication.
Regulation FD is designed to prevent public companies, and persons acting on their behalf, from making selective disclosure of material, non-public information to securities professionals or shareholders who are reasonably likely to trade on the information before it is disclosed the general public. If disclosure is to be made to any of the types of persons enumerated in Regulation FD, public disclosure of any material, non-public information must also be made.
A company can accomplish Regulation FD-compliant disclosure by furnishing or filing a Form 8-K with the SEC. Alternatively, a company may comply with Regulation FD by disseminating such information through another method (or combination of methods) of disclosure that is “reasonably designed to provide broad, non-exclusionary distribution of the information to the public,” and therefore is a recognized channel of distribution, which is frequently done through a press release.
In 2008, the SEC provided guidance on whether a company web site is a recognized channel of distribution for disclosing material, non-public information to the public for the purposes of Regulation FD.1 According to the 2008 guidance, the analysis depends on the steps that the company takes to alert the market to its web site and its practices for disclosing material, non-public information on the web site, as well as market use of its web site. The Report clarifies that the 2008 guidance “is equally applicable to current and evolving social media channels of corporate communication,” emphasizing that “the investing public should be alerted to the channels of distribution a company will use to disseminate material information.”
For a social medium to become a method of public disclosure that satisfies Regulation FD, it must be recognized as a channel of distribution for disclosing material, non-public information about a company. The Report noted that the 2008 guidance encouraged issuers to provide their web site address, along with indications that they routinely post important information on that web site, in their periodic reports and press releases. In the context of social media, the Report observed that “disclosures on corporate web sites identifying the specific social media channels a company intends to use for the dissemination of material non-public information 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.”
The Report also suggested that disclosure of material, non-public information on a corporate officer’s personal social media site, without advance notice that such personal site is being used by the company to disclose information, 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.
The periodic reports of many public companies already include statements that they use their web sites as a means of disclosing material, non-public information, and that provide the web site address which they suggest investors should monitor for news about the company. Companies interested in using social media for public disclosure of material, non-public information should begin to include a specific statement to that effect in their periodic reports and continue doing so on an ongoing basis. Companies should also consider including this announcement as part of their standard press release template.
Public companies that plan to use social media should so indicate on their web site, providing the necessary instructions, with accompanying links, for participation in the social media channels that the company uses for disclosure purposes. No fees should be charged to subscribe to or otherwise access the designated channels of disclosure.
Announcements regarding social media channels should identify the specific social media channels (e.g., Facebook or Twitter) that the company will be using to disclose material, non-public information. A general statement that the company plans to use social media may be insufficient to alert the public as to which channels of social media to monitor for company information.
A Regulation FD analysis is based on facts and circumstances. The steps described above are helpful to analyze whether a social media channel is a recognized channel of distribution for a company’s material, non-public information. However, these steps do not automatically define a social media channel as a method of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public. Therefore, companies interested in developing their social media channels for Regulation FD disclosure should monitor the level of participation in their social media communications. Unless companies are satisfied that the public accepts their designated social media channel as a recognized channel for distribution of information, they are well advised to also simultaneously disclose their Regulation FD information through traditional channels, such as a press release or Form 8-K.
No social media or other communications channel, including channels that may evolve in the future, should be used as an exclusive method to disclose material, non-public information until the company has identified that channel in advance as a source of disclosure of material, non-public information and is comfortable that the public has recognized, and continues to recognize, the channel as such.
Public companies should make clear to their officers, employees, directors and other agents that personal social media channels may not be used to disclose material, non-public information relating to the company.
Public companies should review their disclosure controls and procedures to determine whether revisions are needed to contemplate disclosures made through social media.
If you have any questions about Regulation FD, please contact the author of this Legal Update, Laura D. Richman, at +1 312 701 7304, or any other member of our Corporate & Securities practice.