April 15, 2013
On April 2, 2013, the Securities and Exchange Commission (the “SEC”) issued a report of investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934 providing guidance to public companies on the application of Regulation FD to corporate disclosures made through social media (the “Report”). The Report clarifies that guidelines issued by the SEC in 2008 regarding disclosures on corporate websites apply to public companies’ use of social media to disseminate material, nonpublic information. While many companies already use social media on a regular basis to promote their business and communicate with customers, we expect that the conditions to satisfying the SEC’s guidance and other considerations will, at least in the near term, result in most companies using social media channels to supplement, rather than replace, traditional methods for disclosure of material, nonpublic information, just as companies have done in response to the SEC’s prior guidance regarding disclosures on corporate websites. Nevertheless, the Report serves as an important reminder of the need to consider securities law implications of evolving communication channels and for companies to evaluate the effectiveness of their disclosure controls and procedures in the context of social media disclosures.
Regulation FD Background
The SEC adopted Regulation FD in 2000 to prevent selective disclosure of material information by public companies to those who would reasonably be expected to trade securities on the basis of the information or provide others with advice about securities trading. Regulation FD requires that material, nonpublic information be publicly disclosed on Form 8-K or an alternative method of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public. The SEC has stated that Regulation FD “does not require use of a particular method, or establish a ‘one size fits all’ standard for disclosure.”
In 2008, the SEC issued Guidance on the Use of Company Websites (the “2008 Guidance”) to clarify that company websites can, in certain circumstances, serve as an effective means for disseminating material information to investors consistent with Regulation FD. In the 2008 Guidance, the SEC stated, “in evaluating whether information is public for purposes of our guidance, companies must consider whether and when: (1) a company web site is a recognized channel of distribution, (2) posting of information on a company web site disseminates the information in a manner making it available to the securities marketplace in general, and (3) there has been a reasonable waiting period for investors and the market to react to the posted information.” The 2008 Guidance did not, however, expressly apply to social media. Moreover, despite the 2008 Guidance, relatively few companies today use corporate websites to satisfy their Regulation FD obligations. Instead, most public companies still file a Form 8-K and/or issue a press release, and many then post the same information, or links to the information, on their corporate websites. Some companies in addition post the information to their Facebook page, Twitter account and other social media channels.
The Netflix Investigation
The Report follows an inquiry by the SEC’s Division of Enforcement regarding a July 2012 post by Netflix Chief Executive Officer Reed Hastings on his personal Facebook page stating that Netflix’s monthly online viewing had exceeded one billion hours for the first time, which represented a nearly 50% increase in hours from what Netflix had announced six months earlier. Netflix’s stock price had begun rising before Mr. Hastings’ post and increased from $70.45 at the time of the post to $81.72 at the close of the following trading day. The Report indicates that Netflix did not disclose this information to investors through a press release or Form 8-K filing, and Mr. Hastings and Netflix had not previously used Mr. Hastings’ Facebook page to announce company metrics. Rather, Netflix consistently had directed the public to its own Facebook page, Twitter feed, blog and company website for information about Netflix. In December 2012, Mr. Hastings also stated that Netflix does not “currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings.”
The Report notes that there has been uncertainty concerning how Regulation FD and the 2008 Guidance apply to disclosures made through social media channels. It also indicates that the SEC will not initiate an enforcement action against Mr. Hastings or Netflix.
Applicability of the SEC’s 2008 Guidance on Company Websites to Social Media
The Report states the SEC’s view that company communications made through social media should be examined for compliance with Regulation FD. This includes determining (1) whether a disclosure using social media is to specific individuals covered by Regulation FD (e.g., securityholders and securities professionals), (2) whether the disclosure includes material, nonpublic information, and (3) if not otherwise distributing the information in compliance with Regulation FD, whether disseminating the information via the social media channel is “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.”
In assessing the third prong, the Report states that “[t]he central focus of this inquiry is 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.” The Report then explains that the 2008 Guidance provides a relevant framework for applying Regulation FD to social media channels of distribution.
The 2008 Guidance provides a non-exhaustive list of factors to consider in evaluating whether a company’s posting of information on its website constitutes the use of a “recognized channel of distribution” and whether the information has been made accessible to the securities marketplace, such that the information posted is public for purposes of Regulation FD. These factors, which we have revised to address social media channels, include:
The Report reiterates that public disclosures of material, nonpublic information, even if not directed to stock analysts or other “covered persons” under Regulation FD, must be made in a manner that conforms with Regulation FD whenever such information is disclosed to any group that includes one or more covered persons. The Report also states that, while every case must be evaluated on its own particular facts, the disclosure of material, nonpublic information on the personal social media site of an individual corporate officer–without advance notice to investors that the social media site may be used for such purpose–is generally 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. Without adequate advance notice, some investors may not have the opportunity to access the information at the same time as other investors.
What Companies Should Do Now
The concept of using social media for disclosure purposes is an evolving issue that companies should continue to monitor as communications practices emerge. While the Report confirms that social media can be used in a manner that satisfies Regulation FD, even when persons must enroll with a third-party service to have access, it is also clear that there are hurdles to doing so. As with company websites, social media cannot instantly be deployed as an FD-sufficient means of dissemination for material, nonpublic information. Companies wishing to use social media to communicate market-sensitive information must take steps to satisfy the SEC’s 2008 Guidance and the standards referenced in the Report, and determining whether a particular social media channel constitutes a “recognized channel of distribution” will remain a facts-and-circumstances analysis.
The Report does have broader implications for public companies. Set forth below are several steps that a public company should take now in light of the Report.
 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, Release No. 69279 (Apr. 2, 2013), available at http://www.sec.gov/litigation/investreport/34-69279.pdf.
 Commission Guidance on the Use of Company Websites, Release No. 34-58288 (Aug. 7, 2008), available at http://www.sec.gov/rules/interp/2008/34-58288.pdf. More information on the 2008 Guidance is available at https://www.gibsondunn.com/publications/Pages/SECGuidance-CompanyWebsites-InvestorInformation.aspx.
 See 17 C.F.R. § 243.100(b)(1) (listing brokers, dealers, persons associated with a broker or dealer, investment advisors, institutional investment managers, persons associated with an investment advisor or institutional investment manager, investment companies, affiliates of investment companies, and holders of the issuer’s securities).
 Social Media: Consumer Compliance Risk Management Guidance, No. FFIEC-2013-0001 (Jan. 23, 2013), available at http://www.occ.gov/news-issuances/federal-register/78fr4848.pdf.
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