[Updated on 4/11/13 at the bottom]
Yes, you can use social media to make material public disclosures. The SEC did not punish Netflix CEO Reed Hastings. The reality is, however, the SEC gave a warning to executives: we are not going to do anything this time because our rules weren’t clear, but now you are on notice.
The Netflix CEO Facebook Post
Congrats to Ted Sarados, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June . . . Keep going, Ted, we need even more.
Generally speaking Reg FD prohibits selective disclosure of material information. We don’t want a select group to get information ahead of the general investing public. Therefore, material information must be publicly disclosed. My original post on the SEC investigatation is here. Reg FD focuses on the terms “public” and “material.” To comply, most companies issue press releases or make SEC filings to announce material milestones and financial results.
Yes, Hastings’ Facebook profile was open to the public and he had more than 200,000 friends, many of whom were the same journalists who would have received a press release.
Materiality generally means it is reasonably foreseeable a person may make a trade based on the information. For the 30 hours after the Facebook post, the Netflix stock rose almost 16%. Earlier in 2012, Netflix had touted the number of streaming hours as an important metric of user engagement and therefore an indication of value. The news was picked up by the mainstream press and analysts. There was, however, also a Citigroup research report touting the stock just prior to Hastings’ post that also likely affected the stock price.
The SEC Speaks
So last week, the SEC decided they needed to provide guidance on the use of social media. You can read the report here. To summarize, the SEC authorized companies to use social media to announce material information, BUT only if the company has notified investors that the company intends to use specific identified social media channels.
Hastings escaped an enforcement action because the SEC realized the novelty of the issue and the absence of clarity. The next guy may not be so lucky. The SEC wrote:
Neither Hastings nor Netflix had previously used Hasting’s personal Facebook page to announce company metrics, and Netflix had not previously informed shareholders that Hastings’s Facebook page would be used to disclose information about Netflix. The page was not accompanied by a press release, a post on Netflix’s own web site or Facebook page, or a Form 8 K.
A Few Lessons
Obviously, disclose what social media channels you intend to use.
Just because it is possible, it does not mean publicly-traded companies should exclusively rely upon social media channels to make material disclosures. Should a company supplement the traditional approach with social media, the company needs to disclose what social media platforms it will use. This announcement needs to be done often and through the more traditional channels giving investors time to find and set up their access to these outlets. No magic language is required, something like:
We routinely post information that may be material investment information on our Investor Relations tab on our website found at ______, on our Facebook page found at __________ and on our Twitter account at @________. We encourage you to visit these sites and follow them regularly.
Make sure people know where to go so they can register, subscribe or do whatever is necessary to get the information without forcing them to “like” or “friend” any company or individual. If your company account has very few readers, then it probably would not qualify as a “broad, non-exclusionary distribution of . . . information to the public.” Build your profiles before you use them to make disclosures.
Use Official Company Accounts.
Official company channels are preferred over individuals. Presumably, the people authorized to use the official channels have some training and are more equipped to know the limits. Your investor relations, compliance and legal teams should be involved and monitor the official social media channels. During the training for the social media team, the adage that if you have to hesitate and ask yourself whether this is material information that could affect our stock price, it probably is, or at least it should be vetted through the entire team. When it comes to material information, the same rules would apply to Facebook or 140 characters on Twitter that would apply to the more formal press releases.
By using the official company account rather than the individual CEO account, you also keep it easier to separate what accounts belong to the individual and which belong to the company.
Wouldn’t it be easier to ban the executives from discussing any business on social media?
This is the safe way out. Let the executives talk about their personal life, but don’t let them say anything about the business. I am guessing that some of my non-legal readers are pulling their hair out and screaming that you have to have your CEO engaged in social media. David K. Williams and Mary Michelle Scott opined in this Harvard Business Review blog post “that using social technologies to engage with customers, suppliers, and even with their own employees enables their companies to be more adaptive and agile.”
Regardless of your engagement strategy, even blanket prohibitions against discussing business can create some confusion. Would commenting that you are on the way to the company Christmas party to celebrate the best year yet violate a blanket ban on business talk? Would that violate Reg. FD? Even if you take the more cautious approach, your executives need to be trained on the rules.
So, does legal have to review every post or Tweet before it goes out?
After all, press releases are closely reviewed before they go out. This approach goes too far. The better practice is provide adequate training and implement policies on the front end. The company policy should allow investor relations/legal/compliance to monitor executive social media accounts.
Do we need to train everyone including the new intern?
Everyone should be trained, or at least aware of the social media policy. Reg FD really applies only to persons acting on behalf of the issuer or company which includes “any senior officer of the issuer or any other officer, employee, or agent of the issuer who regularly communicates with securities market professionals or with security holders.” These folks also need to be aware of the company’s Reg FD policy and training.
Should we just identify all official channels and the social media profiles of the top executives?
To be safe, a company could identify all of the various social media accounts of all the people listed above. This would not be a good idea because it make proper disclosures meaningless if you make the information difficult to find.
The identified channel needs to be “a recognized channel of distribution.” The company Facebook page may apply. Your CFO’s Pinterest page full of recipes probably does not. If the disclosures are sporadic, the account won’t garner the broad audience for financial information required by the SEC. Moreover, to qualify, the account must allow for unfettered access and your executives may not want to open their Facebook accounts.
Monitoring is important because companies can try to fix mistakes that fall through the cracks. Reg FD allows for a process of “prompt” disclosure for non-public inadvertent disclosures. When in doubt, call your lawyer.
Did I say something about training?
UPDATE ON 4/11/13
Netflix decided to jump right into the mix. It filed paperwork with the SEC identifying the social media channels it plans on using and Reed Hastings announced on his Facebook page that users had streamed more than 4 billion hours over the last three months. Read more at the Wall Street Journal’s Digits blog here.