The U.S. Securities and Exchange Commission gave disclosures made through social media platforms such as Facebook and Twitter a conditional “thumbs up” in a Report of Investigation it released on April 2, 2013.  Issuers of securities, the SEC stated, can use social media to disseminate material, nonpublic information without having to make any other disclosures or filings as long as the public is given proper advance notice to keep its eyes on those channels.

To promote securities market fairness, Regulation Fair Disclosure, or Reg FD, and Section 13(a) of the Securities Exchange Act of 1934 prohibit public companies and persons acting on their behalf from selectively disclosing material, nonpublic information to certain securities market professionals or shareholders where it is reasonably foreseeable that they will trade on that information, before that information is made available to the general public.  Under Reg FD, such information must be publicly filed with the SEC in a Current Report on a Form 8-K unless disclosed in a way that is “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.”

To address the evolving landscape of electronic communications and issuers’ increasing use of websites to publish information, in 2008 the SEC released guidance that Reg FD applies to disclosures made through issuer websites, “push” technologies that allow automatic notification, such as email alerts and RSS feeds, and blogs.  The lynchpin of the analysis of whether disclosures made through such nontraditional electronic means comply with Reg FD, the SEC stated, is whether the issuer has made investors, the market, and the general public aware of the channels it plans to use to disclose material, nonpublic information so that they have the opportunity to place themselves in the loop.

In 2012, the applicability of Reg FD and the SEC’s guidelines to social media posting, a method of disclosure not specifically contemplated by the SEC’s 2008 guidance, was tested.  Reed Hastings, the CEO of Netflix, published breaking news on his personal Facebook page:  Netflix monthly viewing had exceeded one billion hours for the first time.  Netflix did not file a Form 8-K with the SEC, issue a press release, or otherwise publicly announce the news.  Although Facebook members could subscribe to Mr. Hastings’s Facebook page, and 200,000 had at the time of the post, neither Mr. Hastings nor Netflix had previously used it to break material news or indicated to the investing public that it might be used as a communication channel for such information.   This prompted an SEC investigation that culminated in a decision on April 2, 2013 not to pursue an enforcement action but to use the opportunity to clarify that Reg FD and the SEC’s 2008 guidelines and framework for analysis apply to social media.

“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 S. Canellos, the SEC’s acting enforcement chief, stated. “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.”

In preparing to publish company information through social media, a public company should consider whether Reg FD applies to that disclosure and, if so, whether such disclosure is compliant.  The first step of the analysis is to determine whether any potential recipient of the social media post is a shareholder, securities professional, or other type of person enumerated in Reg FD.  Due to the open-ended accessibility of social media, this is likely to be the case.  If so, and the information is material and nonpublic, the information must either be simultaneously filed in a Form 8-K or disclosed in a manner “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.”  The key to compliance without filing a Form 8-K, the SEC has indicated, is to take proper steps to ensure that the public is on notice as to each outlet for material, nonpublic information about the issuer and that access to those outlets is available to those who want it.  Proper notice can be given by including in periodic reports filed with the SEC and press releases information on the specific social media channels a company intends to use to disseminate material, nonpublic information and maintaining consistency in practice.

While Netflix and Mr. Hastings received a free pass on Mr. Hastings’s Facebook post, the SEC’s message is clear:  Execs, don’t try this at home.  “Although every case must be evaluated on its own facts, disclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, 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 SEC stated in its Report of Investigation.  The safest bet is still to file sensitive disclosures in a Form 8-K, but the SEC’s latest guidance has opened the door to the use of social media posting as an independently sufficient form of disclosure.

Now might be an opportune time for issuers to dust off their electronic communications policies, clarify social media usage guidelines for employees, and take steps to make the public aware of each specific channel through which they expect to disseminate material, nonpublic information.

UPDATE (April 11, 2013):

Taking cues from the SEC’s Report of Investigation, on April 10, 2013 Netflix publicly filed a Form 8-K with the SEC in which it stated that, in addition to traditional channels of dissemination, Netflix uses social media to communicate company information. “It is possible that the information we post on social media could be deemed to be material information,” Netflix signaled.  Netflix also updated the main page of its Investor Relations website to mirror its 8-K filing.

In its 8-K and on its Investor Relations website, Netflix encourages investors, the media and others interested in the issuer to stay tuned to various Netflix social media channels:  the Netflix U.S. & Canada Blog, The Netflix Tech Blog, the Netflix Facebook page, the Netflix Twitter feed and, most notably, Reed Hastings’s personal Facebook page, on which Mr. Hastings posted the message in 2012 that sparked the SEC’s investigation and which Netflix had not previously indicated could be a source of material, nonpublic information about the company.

Netflix’s official notices increase the likelihood that its future disclosures of material, nonpublic information through the social media channels it has identified pass muster under Reg FD.  As the SEC indicated in its 2008 guidance and the Report of Investigation, however, whether a particular disclosure complies with Reg FD’s requirement that material, nonpublic information be disseminated in ways “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” will depend on a multifaceted fact-based analysis.

On its own, an issuer’s public identification of specific social media channels as potential sources of material, nonpublic company information does not necessarily ensure that any future disclosures of such information through those channels will be found compliant with Reg FD.  Therefore, one practical point for issuers to note is that, once a social media channel has been publicly designated, further steps should be taken to establish that channel as a recognized source of disclosure.  Such steps may include, for example, consistently using that channel to disclose material, non-public information on an equal basis with the issuer’s other channels of distribution.

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Photo of Wai Choy Wai Choy

Wai Choy has deep expertise in technology, media and intellectual property-related transactions and counseling and is a partner in Proskauer’s Corporate Department, Technology, Media & Telecommunications (TMT) Group, and Blockchain & Digital Assets Group. He is recognized as a trusted advisor to asset…

Wai Choy has deep expertise in technology, media and intellectual property-related transactions and counseling and is a partner in Proskauer’s Corporate Department, Technology, Media & Telecommunications (TMT) Group, and Blockchain & Digital Assets Group. He is recognized as a trusted advisor to asset managers, operating companies and other enterprises at various stages in their development and across industries, including technology, technology-enabled services, media, financial services, e-commerce, sports and healthcare.

In the context of private equity, mergers, acquisitions and financings, Wai:

  • Structures and negotiates key transaction documents, such as purchase, merger, transition services and intellectual property license agreements;
  • Leads teams in conducting legal due diligence and provides industry-specific market insights;
  • Advises clients on technology, intellectual property, privacy and data security matters; and
  • Represents portfolio companies pre-sale or post-acquisition in their business operations, including key commercial transactions and strategic agreements.

Wai also helps operating companies navigate legal and business matters in their day-to-day business operations and leads the structuring, drafting and negotiation of a wide range of contracts, such as:

  • Service agreements for a variety of services, including outsourcing, software as a service (SaaS) and other hosted services, data analytics, digital marketing, software and website development, systems integration, technology implementation and payment processing;
  • Collaboration agreements between strategic partners for the development, manufacturing and commercialization of new technology, products and services;
  • Software license agreements and other complex intellectual property license and assignment agreements;
  • Revenue sharing, joint venture, reseller, supply, equipment purchasing, manufacturing and other types of general commercial agreements;
  • Content production, license and distribution agreements covering various business models and distribution methods;
  • In the biotech, pharma and medical device arena, agreements covering research and development collaborations, intellectual property licenses, manufacturing, supply and distribution services, sponsored research, grants, revenue sharing and other strategic partnerships among commercial entities, academic institutions and/or charitable organizations;
  • Terms of use, privacy policies and end user license agreements for websites, mobile apps and other software; and
  • Advertising-related agreements spanning digital, radio and billboard media, including programmatic advertising platform agreements, lead generation service agreements, advertising reseller and affiliate agreements, insertion orders and advertising terms and conditions.

Wai serves as Co-Editor of Proskauer’s Blockchain and the Law blog and counsels business and legal teams on blockchain and distributed ledger technology development, structuring and implementation, cryptocurrencies, non-fungible tokens (NFTs), fan tokens and other digital assets, and associated legal issues.

Prior to joining Proskauer, Wai worked in the Business & Legal Affairs departments of Marvel Studios in Los Angeles and Marvel Entertainment in New York. At the University of Pennsylvania Law School, Wai served as Senior Editor of the University of Pennsylvania Law Review and was a Levy Scholar.