It’s a little bit odd for a government agency concerned with full disclosure to bury important guidance but that’s just what the SEC did in resolving their dispute with Netflix. Social media practitioners will recall when the SEC first announced they were contemplating a formal investigation of Reed Hastings for posting on Facebook that Netflix had passed the billion streaming hours per month milestone. This triggered a flood of press, even a blog post on this site, about the investigation and whether the SEC understood social media. Yesterday, the SEC announced via press release that after its initial inquiry it would not launch a formal investigation.
But that wasn’t the real news.
Even though the press release and the seeming end of the matter is what was reported the most yesterday, the real news lies in the SEC’s Report of the Investigation it issued along with the press release. Because buried within the investigation report, the SEC has issued guidance on how publicly traded companies can use social media.
That’s guidance with a lower case ‘g,’ not Guidance–which is typically released with more fanfare and a longer title. For example, the original Regulation FD (if you want more background on Reg FD or this case, check the earlier SoMeLaw Thought How To Tell One Billion People A Secret) was adopted to prevent companies from giving information to only selected investors via phone calls. As use of the Internet expanded, the SEC issued the Commission’s 2008 Guidance on the Use of Company Web Sites (much longer title, see?) which covered how companies could use their own site to distribute information. It also included some general language to cover emerging technologies, which back then were “push” technologies and RSS readers. While social media existed in 2008 it was not on most people’s radar, certainly not the SEC, and the 2008 guidance primarily discusses technologies controlled by a company used to distribute information. It never formally addresses how a company might use someone else’s web site (such as Facebook.com) for distributing information.
This put the SEC in a bit of a bind as it attempted to look into Hastings’ Facebook postings. Did it need to issue new Guidance about social media or were Reg FD and the 2008 Guidance enough? The SEC decided the right answer was yes and no.
In the press release, Lona Nallengara, Acting Director of the SEC’s Division of Corporate Finance, was quoted with saying
“Companies should review the Commission’s existing guidance — it is flexible enough to address questions that arise for companies that choose to communicate through social media, and the guidance does so in a straightforward manner.”
So according Director Nallengara, the existing guidance was sufficient. But inside the investigation report, the SEC states
[T]he Commission deems it appropriate and in the public interest to issue this Report of Investigation (“Report”) pursuant to Section 21(a) of the Exchange Act to provide guidance to issuers regarding how Regulation FD and the 2008 Guidance apply to disclosures made through social media channels.
Leaving aside the SEC’s statement that social media is no different than other web sites, blogs, or RSS feeds (I think we could debate that), or the fact that they found it necessary to issue guidance while simultaneously saying the previous guidance was sufficient, the SEC does go on to issue specific guidance for how publicly traded companies can continue to use social media channels while complying with Reg FD. There are two main points that the SEC provides some little ‘g’ guidance.
If you disclose to one of these people, Reg FD may be triggered
These people are listed in § 243.100(b)(1) but just in case you don’t have that handy, here they are:
- Stock brokers and dealers
- Investment advisers
- Investment companies
So if you’re a publicly traded company and you’re posting something publicly on Facebook, that odds that someone is subscribed to your posts and in this list are approximately 100%, give or take 0%. There’s still going to be the analysis of whether you are disclosing material, previously non-public information, but even if you only have one stockholder subscribed to your feed and a million people who aren’t on this list, Reg FD applies.
Publicly traded companies should identify their social media sources for disclosures
Recognizing that the channels being used by companies are changing so quickly, the SEC’s guidance here is for companies to disclose what channels they use and how they intend to use them. This seems a bit overbearing since it can be difficult to say exactly how you’ll use a particular account or community, but the intention here is a good one. There are giant social media platforms and then there are hundreds of equally small yet interesting sites that publicly traded companies might use. Telling investors which sites are significant enough for the company to follow for disclosures will prevent interested parties from trying to research every new platform to see if a company has established a presence yet.
While I think the guidance is good, it still avoids some of the crucial questions intially presented by the Hastings case–when is something disclosed to the public in social media? The SEC report spends significant time talking about how some press outlets immediately saw the Hastings Facebook post and published reports while mainstream financial press covered it later, perhaps after the market closed. That could be true, but does that differ from issuing a press release on the same subject? Did the SEC find a single mainstream financial press reporter that felt the story was late because they didn’t know where to look? Did they find any investors that wanted this information, always attend every investor phone call, yet didn’t get this information in a timely manner?
The focus of Reg FD was to fix selective disclosures. The SEC wanted to make sure all investors got the same information. Reg FD was never intended to address the issue of people getting the information instantly. Social media has changed our expectation of when we receive information and how we can receive it, and the SEC is making an attempt to address the changing environment. But it seems like there’s one more case that may need to come out to resolve the issue. For example, the first time a company doesn’t list Twitter as an official source of information but tweets out to over a million followers some material information, what will the SEC do?