United States: The Guide To Social Media And Securities Law

INTRODUCTION

The growing use of social media has created challenges for federal securities regulators, who must enforce antifraud rules that were written at a time when the prevailing technology was the newspaper.

This Guide summarizes how federal regulation of securities has evolved in the face of the growing use of social media by investors, securities issuers, broker-dealers, investment advisers and investment companies. Given the fast pace of changes, this Guide is a work in progress.

REGULATION FD

Beginning in 1999 and continuing into 2000, media reports about selective disclosure of material nonpublic information by issuers raised concerns that select market professionals who were privy to this information profited at the expense of others. A consensus began to emerge that selective disclosure (1) adversely affects market integrity (to a similar extent as does insider trading) and (2) allows issuers to use nonpublic information unfairly to gain favor with analysts or investors.¹

In response to the perceived threat presented by selective disclosure of material nonpublic information by issuers, the Securities and Exchange Commission (SEC) adopted Regulation Fair Disclosure ("Regulation FD") in 2000. Regulation FD requires an issuer that discloses material nonpublic information to certain individuals (generally holders of the issuer's securities and securities market professionals) to also make the information publicly available. The required timing of the public disclosure depends on whether the issuer selectively disclosed the information intentionally. If the issuer made the selective disclosure intentionally, the issuer must simultaneously present the material to the public. If the issuer made the selective disclosure unintentionally, it must promptly disclose the information to the public.

Regulation FD provides that a person acting on behalf of a company can be (1) any senior official of the issuer or (2) any other officer, employee or agent of an issuer who regularly communicates with any of the enumerated persons described in Regulation FD (generally thought to include directors, senior officers, investor relations and public relations officers, or people who perform similar functions, as well as any other agents or employees of a company who regularly communicate with company investors and market professionals). Regulation FD also extends to any employee who has been directed to make a selective disclosure by a member of senior management. If a noncovered employee makes selective disclosure, and if that employee has been directed to make the selective disclosure by a senior official, then the senior official would be held responsible for the selective disclosure.

The question of who is a "covered person" for Regulation FD purposes is important from a social media perspective because those within a company who are responsible for social media communications may not be the most senior executives in the company and may have a role that is different from the role of traditional investor relations professionals. Here's a principal concern: An employee responsible for tweeting, or posting on Facebook, or providing information through another social media outlet, may not be a senior official or person who generally communicates with the company's investors or market professionals. Nonetheless, Regulation FD's requirements may apply when the employee is handling and communicating material nonpublic information about the company.

Moreover, covered persons must carefully consider whether statements made through social media would be considered personal to the individual and not subject to regulation, or statements attributable to the company.

Determining If Information Posted on a Website Is Public

Regulation FD effectively requires issuers to consider whether they adequately disseminate information to the public. When the SEC adopted Regulation FD in 2000, it indicated that public disclosure "may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, nonexclusionary distribution of the information to the public."²

Since then, issuers have disclosed significantly more information on their websites.³ In 2000, the SEC stopped short of stating that it considered disclosure on a company's website to be adequate public dissemination.⁴ At the time, the SEC indicated that "[a]s technology evolves and as more investors have access to and use the Internet," the SEC might consider a website posting to meet the public disclosure requirements of Regulation FD.⁵ In 2008, the SEC addressed the issue in an interpretive release providing guidance as to whether information on a company's website could be considered a sufficient means of public disclosure for the purposes of Regulation FD. The SEC determined that when a company is evaluating if information posted on its website is public or not, the company must consider whether:

• a company website is a recognized channel of distribution;
• posting of information on a company website disseminates the information in a manner making it available to the securities marketplace in general; and
• there has been a reasonable waiting period for investors and the market to react to the posted information.⁶

In determining whether a company's website is a recognized channel of distribution, the analysis focuses on what the company has done to notify investors and the market of its website and disclosure policy. The SEC indicated that steps a company can take to establish its website as a recognized channel for disclosing information include:

• listing a company's website address on periodic reports and press releases;
• establishing a pattern of posting important information on its website; and
• informing investors that they can find important information about the company on its website.

In evaluating whether the posting of information on a company website disseminates the information in a manner making it available to the public in general, the SEC indicated that companies should focus on the manner in which the information is posted on a company's website and the accessibility of such information. Questions that a company should consider include:

• Is the website designed to effectively direct visitors to important information?
• Is information for investors prominently displayed on the website?
• Do the media regularly pick up and report information posted on the company's website?

The SEC also noted that a company can also improve the accessibility of information on its website by utilizing "push" technology. Push technology is a type of communication that originates with a publisher of the information, such as an RSS feed, in contrast to the concept of a "pull" communication, which originates with the consumer of information.

In determining if there has been a reasonable waiting period for investors to react to information posted on a company's website, the SEC indicated that the analysis depends on the circumstances of the dissemination. For a website, this means evaluating the traffic that the site generates, how often investor-specific information is accessed and the complexity of the information presented. For example, simple information posted on a website with heavy traffic that is routinely used by investors would likely be considered disseminated to the public sooner than complex information that is posted on a website with little traffic and that is not routinely used by investors.

Rule 101(e) of Regulation FD specifies that the filing or furnishing of information on a Form 8-K is sufficient to make the information public for the purposes of Regulation FD, notwithstanding any other efforts on the part of a company to utilize some broad, nonexclusionary means to disseminate that information. In public forums, the SEC Staff has indicated that an effective model for accomplishing the dissemination of information in a Regulation FD-compliant manner, at least with earnings announcements, would be to first furnish to the SEC an earnings release with an Item 2.02 Form 8-K, and then, following confirmation of the appearance of the filing on EDGAR, proceed with website posting of the earnings release.

The factors for determining if information has been adequately disseminated to the public for the purposes of Regulation FD are equally applicable for determining if information is publicly available for antifraud purposes.⁷ For example, a potential plaintiff or the SEC would likely not be able to successfully allege that material nonpublic information had not been adequately disclosed to the market in the course of trading by a company in its own securities if the company had taken the necessary steps discussed above to disseminate the information.

To facilitate an ongoing determination that a company's website is a recognized channel of distribution of material information concerning the company, it is suggested that the company take the following steps:

• In all company communications to investors, include a statement that the company routinely posts all important information about the company on its website and include a reference to the URL of the company's website.
• Consider including a separate means to access the Investor Relations pages of the company's website from the main page of the website so that it is more readily apparent where investors may locate important information about the company that is posted on the company's website.
• Monitor the dissemination of information to determine the extent to which information reaches intended audiences and the extent to which persons access the company's website for material information about the company.

SEC Guidance on the Use of Social Media

As companies rely more heavily on social media, a critical question is whether public dissemination of information through social media is adequate for purposes of compliance with Regulation FD.

In a Report of Investigation under Section 21(a) published on April 2, 2013, the SEC said that social media channels—such as Twitter and Facebook—could be used by public companies to disseminate material information, without running afoul of Regulation FD.⁸ The SEC emphasized that companies should apply the guidance from its 2008 interpretive release regarding the disclosure of material information on company websites when analyzing whether a social media channel is in fact a "recognized channel of distribution," including the guidance that investors must be provided with appropriate notice of the specific channels that a company will use to disseminate material nonpublic information.

Section 21(a) of the Exchange Act authorizes the SEC to investigate violations of the federal securities laws and, in its discretion, "to publish information concerning any such violations." Section 21(a) Reports do not represent an adjudication of the facts or issues addressed. Rather, they express the SEC's views regarding the matters discussed in the report. Because the Section 21(a) Report describes the views of the SEC, it can serve as authoritative interpretive guidance on the matters discussed, much like an SEC interpretive release. In the course of an investigation of a potential Regulation FD violation arising from a CEO's Facebook post, the SEC Staff learned that there was uncertainty as to how the 2008 Guidance should apply in the context of releasing information through social media channels, so the SEC determined that the 21(a) Report would serve as a vehicle for communicating how to apply Regulation FD and the 2008 Guidance to communications made through social media channels. The SEC did not initiate an enforcement action or allege wrongdoing in connection with issuing the 21(a) Report.

The SEC confirmed in the 21(a) Report that Regulation FD applies to social media and other emerging means of communication used by public companies in the same way that it applies to company websites as discussed in the 2008 Guidance, which clarified that websites can serve as an effective means for disseminating information if investors have been made aware that they can locate the company information on the website.

The 21(a) Report indicates that, while every situation 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 social media site may be used for this purpose, is unlikely to qualify as an acceptable method of disclosure under securities laws. In this regard, the SEC notes that it would not normally be assumed that the personal social media sites of public company employees would serve as channels through which the company discloses material nonpublic information.

The SEC acknowledges in the 21(a) Report that the ways in which companies may use social media channels are not fundamentally different from the ways in which the websites, blogs and RSS feeds addressed by the 2008 Guidance are used. In revisiting the 2008 Guidance in the context of social media channels, the SEC notes that the 2008 Guidance was designed to be flexible and adaptive, and therefore provides issuers "with a factor-based framework for analysis, rather than static rules applicable only to web sites." In analyzing whether a website is a recognized channel of distribution, the SEC notes:

In analyzing how Regulation FD applies to any communication, the SEC notes that while the Regulation FD adopting release highlighted concerns about "selective" disclosure of information to favored analysts or investors, "the identification of the enumerated persons within Regulation FD is inclusive, and the prohibition does not turn on an intent or motive of favoritism." The SEC also emphasizes that nothing in Regulation FD suggests that disclosure of material nonpublic information to a broader group that includes both enumerated and nonenumerated persons, but that still would not constitute a public disclosure, would somehow result in Regulation FD being inapplicable. Rather, the SEC states that "the rule makes clear that public disclosure of material nonpublic information must be made in a manner that conforms with Regulation FD whenever such information is disclosed to any group that includes one or more enumerated persons." As a result, whenever a company discloses information to enumerated persons, including to a broader group of recipients through a social media channel, the company must consider whether that disclosure implicates Regulation FD. Issuers should determine, for example, whether the disclosure includes material nonpublic information and whether the information was being disseminated in a manner "reasonably designed to provide broad, nonexclusionary distribution of the information to the public" in the event that the issuer did not choose to file a Form 8-K.

Drawing on the reference to "push" technologies (such as email alerts, RSS feeds and interactive communication tools, such as blogs) in the 2008 Guidance, the SEC acknowledged that social media channels are an extension of these concepts, and therefore the guidance should apply equally in the context of social media channels. Given the "direct and immediate communication" possible through social media channels, such as Facebook and Twitter, the SEC expects companies to examine whether such channels are recognized channels of distribution. In particular, the SEC emphasized the need to take steps to alert the market about which forms of communication a company intends to use for the dissemination of material nonpublic information. The SEC notes that without this sort of notice, the investing public would have to keep pace with a "changing and expanding universe of potential disclosure channels." The ways in which such notice could be provided would include (1) references in periodic reports and press releases to the corporate website and disclosures that the company routinely posts important information on that website and (2) disclosures on corporate websites identifying the specific social media channels a company intends to use for the dissemination of material nonpublic information (thereby giving people the opportunity to subscribe to, join, register for or review that particular channel).

In light of the SEC's guidance, companies should consider whether to specifically address the use of social media in their Regulation FD policies, including whether prohibitions, restrictions or editorial oversight should be implemented to govern the use of social media by those persons authorized to speak for the company. This area is still evolving and should be continuously monitored, as the methods for interacting with shareholders, analysts and others continue to evolve.

As with the 2008 Guidance, companies may not be able to implement the 21(a) Report's guidance to eliminate more traditional forms of public dissemination. But the guidance may provide more comfort for companies using social media to supplement other more traditional forms of communication. Companies should carefully evaluate which social media channels may be useful for communicating information and begin providing notice to investors in the company's filings that information about the company may be found on those social media channels, while using those channels as a regular source of information. At the same time, companies should advise individual officers, directors and employees that posting information about the company on social media channels could potentially implicate Regulation FD, and therefore such persons must exercise caution when communicating through social media.

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Footnotes

Selective Disclosure and Insider Trading, 65 Fed. Reg. 51,716 (Aug. 24, 2000), available at http://www.gpo.gov/fdsys/pkg/FR-2000-08-24/pdf/00-21156.pdf.

2 Selective Disclosure and Insider Trading, 65 Fed. Reg. at 51,716.

3 Commission Guidance on the Use of Company Web Sites, 73 Fed. Reg. 45,862 (Aug. 7, 2008), available at http://www.gpo.gov/fdsys/pkg/FR-2008-08-07/pdf/E8-18148.pdf.

4 Id.

5 Id.

6 Id.

7 Listed public companies also must consider stock exchange guidelines on the release and dissemination of information. Both the New York Stock Exchange and NASDAQ have policies that require prompt release of material nonpublic information to the public in a manner that is compliant with Regulation FD.

8 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, Release No. 34-69279 (April 2, 2013) (the "21(a) Report"), available at https://www.sec.gov/litigation/investreport/34-69279.pdf.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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