In yet another reminder of how pervasive social media use has become in our society, the SEC yesterday provided guidance regarding the use of social media outlets like Twitter and Facebook for official disclosures by publicly-traded companies. The SEC released a Report of Investigation clarifying that companies are permitted under the federal securities laws to use social media—including the personal Facebook and Twitter accounts of company executives—to disseminate information such as company metrics as long as the company has taken sufficient steps to alert the investing public that the social media account in question is a “recognized channel of distribution” for material information about the company.
The SEC also announced that they would not pursue an enforcement action against Netflix nor its CEO, Reed Hastings, because the Commission recognized the market’s uncertainty about the application of Regulation FD (Fair Disclosure) to social media. The SEC’s Report, issued in conjunction with a press release, marks the conclusion of the SEC’s investigation into Netflix and Mr. Hastings over a June 2012 Facebook post that Mr. Hastings made on his personal page. In that post, Mr. Hastings announced that Netflix’s monthly online viewing had exceeded one billion hours for the first time, which caused Netflix’s share price to immediately jump significantly because it represented a nearly 50% increase over a six month period. Because Netflix had not released the information to investors in any other format, and because the SEC’s 2008 Guidance on the Use of Company Websites merely addressed websites, blogs and RSS feeds, the SEC investigated whether Mr. Hasting’s Facebook post was in compliance with Regulation FD and the Commission’s 2008 Guidance.
The Report referred issuers back to its 2008 Guidance, emphasizing that it “continues to provide a relevant framework for applying Regulation FD to evolving social media channels of distribution.” Specifically, the Report clarified that disclosure of material nonpublic information through social media will qualify as an acceptable method of disclosure under the federal securities laws only if it is one of the company’s “recognized channel[s] of distribution” for communicating with its investors and the Commission “expect[ed] issuers to examine rigorously” whether a particular social media channel qualifies. This is consistent with the Commission’s 2008 Guidance, which clarified that in order to make information public under Regulation FD, the information in question must be “disseminated in a manner to reach the securities market place in general through recognized channels of distribution.” The 2008 Guidance provided that “whether a company’s website is a recognized channel of distribution of information will depend on the steps that the company has taken to alert the market to its web site and its disclosure practices, a well as the use by investors and the market of the company’s website.” Therefore, determining whether a social media platform is a recognized channel of distribution and whether posts are “disseminated” requires an understanding and evaluation of the particular account’s privacy settings and access levels, as well as a host of other functionality-related information.
The Report’s conclusions serve as a reminder to all counsel that the vast majority of companies and individuals use social media, and that the resulting tidal wave of evidence created by social media usage must be considered when counseling clients. Consequently, attorneys must be familiar with how social media works and how it fits into existing laws and regulations.
By supporting companies’ use of social media channels for contemporary market communications through its provision of relevant legal guidance, the Commission has solidified its position at the spear’s tip of ongoing efforts by courts, regulators and policy makers to interpret how social media fits into existing legal frameworks. There is no doubt that social media evidence is playing a more critical and pervasive role in civil and criminal proceedings, as this blog has previously noted. And government agency guidance, such as the SEC’s Report, will continue to develop to account for evolving social media channels, changes that will increasingly bring these new forms of communication squarely within the reach of government regulation. The SEC’s Report even recognized the difficulty of adapting to the rapid proliferation of social media by explaining that, without advance notice that a particular social media channel may be used to make company disclosures, the investing public “would be forced to keep pace with a changing and expanding universe of potential disclosure channels, a virtually impossible task.” But, that is exactly what counsel must do to effectively advise clients regarding the potential legal risks of social media use and the potential offensive litigation opportunities presented by an opponent’s social media use—counsel must keep pace with this brave new world of social media evidence and its legal implications.