On April 2, 2013, the Securities and Exchange Commission (“SEC”) released its Report of Investigation of Netflix, Inc. and its CEO Reed Hastings<spanclass="pubbodyttext"></spanclass="pubbodyttext">, clarifying that companies can use social media to disseminate information to investors in compliance with Regulation Fair Disclosure (“Reg FD”) if certain requirements are met. As with company websites, to comply with Reg FD, investors’ access to the chosen social media platform must not be restricted and investors must be alerted about which social media will be used to disseminate information. The primary takeaway from the SEC’s release is that social media must be worked into every issuer’s corporate communications policies and procedures to ensure that these communications are monitored for Reg FD and other securities law compliance. Diligence in analysis under the securities laws for Reg FD compliance is more important than ever. While the SEC may not have acted with respect to Netflix, the SEC will surely continue to be on the lookout for Reg FD violations in the context of social media.
Lona Nallengara, Acting Director of the SEC’s Division of Corporation Finance, suggested that “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.” The SEC is referring to the last guidance it issued on the use of company websites, which was released nearly five years ago. That guidance focused on how companies used websites to disseminate information to investors in compliance with the federal securities laws. Although it neglected to develop new guidance specific to social media, the SEC acknowledged that social media use (e.g., Facebook, Twitter, LinkedIn) has been rapid and widespread—you can even follow the SEC on its Facebook page and several Twitter handles including @SEC_Enforcement. The increased reliance on social media platforms by companies for marketing and dissemination of information has raised significant questions for companies that communicate with investors and customers via social media while simultaneously complying with the relevant securities laws. Recognizing a lack of clarity, the SEC cited ambiguity as the reason it is not bringing any enforcement action against Netflix or Mr. Hastings. This uncertainty has manifested in several scenarios over the last few years:
- WebMediaBrands, Inc. Takes to Twitter and Attracts SEC Attention (2010): Alan Meckler, CEO of WebMediaBrands, drew scrutiny for his activity on Twitter, where he published news about WebMediaBrands, including news related to financial results and pending acquisitions. The SEC’s Division of Corporation Finance sent a comment letter to the company asking it to “explain  whether [the blog] updates conveyed information in compliance with Regulation FD and other Commission rules and regulations.” WebMediaBrands took the position that the tweets did not relate to material non-public information and argued that even if they did, the disclosures were nonetheless compliant with Reg FD and the SEC’s 2008 Guidance. WebMediaBrands argued compliance on the grounds that WebMediaBrands’ website is the internet company’s recognized channel of distribution and the information is disseminated in such a manner that it is widely available to the entire market (e.g., the website includes both Mr. Meckler’s blog and a clearly displayed link to Mr. Meckler’s Twitter feed). The SEC reported no further action on the matter.
- A Vocal CFO Plus Twitter and Facebook Accounts Equals Trouble (2012): On May 14, 2012, Gene Morphis was terminated from his position as the chief financial officer of Francesca’s Holdings Corp. because, according to the company, he “improperly communicated company information through social media.” For instance, Mr. Morphis tweeted during a quiet period, “Board meeting. Good numbers=Happy Board.” This disclosure contributed to the company stock price surging 15% to $26.78 before the earnings announcement. While the Twitter account – under the Twitter handle @TheOldCFO – did not reveal Mr. Morphis’ identity, the Twitter account was linked to his personal blog and his LinkedIn profile directed viewers to the Twitter feed. There is no public announcement that the SEC took any action with respect to this matter.
The Netflix Matter
Those two publicity-grabbing scenarios led to much uncertainty regarding Reg FD in the context of social media and seemingly set the stage for the Netflix inquiry. In December 2012, Netflix announced that the SEC was considering bringing an action for violations of Reg FD surrounding a Facebook post made by Netflix’s CEO on his personal Facebook page. The Facebook post stated:
Congrats to Ted Sarandos, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away. Keep going Ted, we need even more!
According to the SEC, the post was not accompanied by a press release or a post on the Netflix website, and the information was not filed with the SEC on a Form 8-K. However, as pointed out in a recent working paper by Joseph A. Grundfest of Stanford Law School and The Rock Center for Corporate Governance, the CEO’s post was (i) immediately available to 205,000 Facebook followers, (ii) referenced in a tweet by TechCrunch to its more than 2.5 million followers within an hour and (iii) referenced within 24 hours by traditional press outlets, including the Los Angeles Times, Bloomberg News, Forbes, NBC News Online, PCMag.com, and others.
In this week’s report, the SEC stated that it decided not to pursue an enforcement action against Netflix or Mr. Hastings. The SEC sought to clarify any confusion regarding the applicability of the 2008 Guidance to social media and stated flatly, “[t]he ways in which companies may use these social media channels  are not fundamentally different from the ways in which web sites, blogs, and RSS feeds addressed by the 2008 Guidance are used.” The SEC then walked through the history of the 2008 Guidance and the facts of the Netflix matter before turning to the central regulatory issue.
The SEC noted that companies would be wise to keep in mind that “the analysis of whether Regulation FD was violated is always a facts-and-circumstances analysis based on the specific context presented.” The SEC’s ultimate conclusion in this matter had two prongs:
- Communications through social media channels require careful Reg FD analysis comparable to communications through more traditional channels; and
- The principles outlined in the 2008 Guidance – and specifically the concept that the investing public should be alerted to the channels of distribution a company will use to disseminate material information – apply with equal force to corporate disclosures made through social media channels.
The SEC’s clarification should not be viewed as an easing of the reins on Reg FD enforcement. Indeed, the SEC has made it abundantly clear that it expects issuers to add social media communications to the list of various investor communications that are analyzed for Reg FD compliance. Companies should consider their plans for corporate communications via social media and let investors know their intentions. Importantly, the SEC said that:
We emphasize for issuers that the steps taken to alert the market about which forms of communication a company intends to use for the dissemination of material, non-public information, including the social media channels that may be used and the types of information that may be disclosed through these channels, are critical to the fair and efficient disclosure of information. Without such notice, the investing public would be forced to keep pace with a changing and expanding universe of potential disclosure channels, a virtually impossible task.
Considerations Going Forward
While the SEC did not provide any new guidance on how to utilize social media in a manner that complies with Reg FD, it did clarify that these social media communications must be analyzed for Reg FD compliance. Issuers are advised to include policies surrounding social media in corporate communications policies and procedures to ensure that disclosure of material information about the company by its directors, officers, employees and consultants is made fairly and in compliance with federal securities laws. Among other things, those policies and procedures should discuss how to analyze Reg FD compliance.
In evaluating Reg FD compliance for social media communications, the issuer should consider at least the following factors in determining whether the communication will be a “recognized channel of distribution” and therefore comply with Reg FD:
- Limit business-related social media use to authorized spokespersons. Social media can be used in connection with disseminating information regarding an issuer’s business, but such use must be limited to only certain employees and purposes as authorized by senior management. Companies should assume that the SEC will attribute senior executives’ social media statements to the company. By the same token – and as the National Labor Relations Board has indicated – issuers should ensure that their social media policies do not impermissibly chill non-managerial employees in the exercise of rights protected under the National Labor Relations Act. Of course, employees can be prohibited from disclosing material non-public information under social media policies.
- Notify investors of sources of company information. If the issuer intends to disseminate information to investors via social media platforms, it should clearly identify those social media channels on its own website and alert investors through a recognized channel of distribution (such as periodic or current reports filed with the SEC, press releases or similar means) that the company is using its website for this purpose. For instance, if the CEO is going to maintain a Twitter account and post company information there, the company should point investors to the company’s website for information regarding the social media accounts that will be used by the company to disseminate information, including the CEO’s Twitter account. Of course, it is always prudent to file a Form 8-K with the SEC noting that the disclosure has been made and attaching a copy. The important aspect of any approach is freely accessible, widely known notice of the company’s chosen communications methods for material information.
- Assess whether particular information is material and non-public. Issuers should consider whether social media communications reveal new material information on any topic, such as, for example, (i) offerings of company securities, (ii) mergers, acquisitions or other strategic transactions, (iii) company financial performance or (iv) important business developments or key executive changes. When in doubt, issuers should err on the side of caution and assume that the information is material. If the communication includes new material information, the issuer should assess whether the means of communication is a recognized channel of distribution and, if not, plan to distribute the information by such means prior or simultaneously with the dissemination of such information via social media.
- Utilize the “Safe Harbor" for inadvertent disclosures if necessary. If material non-public information is inadvertently disclosed on a selective basis via social media, the issuer should have disclosure controls and procedures in place to immediately (and in no event after the later of 24 hours or the commencement of the next day’s trading) disclose such information by a broadly disseminated press release and Form 8-K.
Keep other securities law obligations in mind. When social media is used to disclose company information, traditional securities law disclosure rules need to be considered, including: (i) identification of forward-looking statements and inclusion of meaningful risk factors as necessary; (ii) avoiding “entanglement” or adoption for securities law purposes by the company of third-party statements that may be linked or included in company posts; and (iii) during heightened times of scrutiny, such as solicitation of proxies, offerings of securities or other transactions, be mindful of obligations to file with the SEC the contents of social media statements. For example, in connection with a pending merger and in an effort to comply with Regulation M-A (Mergers and Acquisitions), companies have recently disclosed company and executive tweets and Facebook postings pertaining to the merger in widely disseminated SEC filings.
For more information on the issues discussed above, contact R. Todd Cronan, Deborah S. Birnbach, Lisa R. Haddad or the Goodwin Procter attorney to whom you typically direct your inquiries.
 SEC Release No. 69279, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, April 2, 2013.
 Securities & Exchange Commission, Press Release No. 2013-51, SEC Says Social Media OK for Company Announcements if Investors Are Alerted, April 2, 2013.
 SEC Release Nos. 34-58288, IC-28351, Commission Guidance on the Use of Company Web Sites, Aug. 7, 2008.
 WebMediaBrands, Inc., SEC Comment Letter, Dec. 9, 2010.
 WebMediaBrands, Inc., Response Letter at 1-4, Jan. 7, 2011.
 “Francesca's Holdings Terminates Employment of CFO Gene Morphis Following Board Investigation of His Use of Social Media,” May 14, 2012.
 Joseph A. Grundfest, “Regulation FD in the Age of Facebook and Twitter: Should the SEC Sue Netflix?,” Rock Center for Corporate Governance at Stanford University Working Paper No. 131. (Jan. 30, 2013).
 SEC Release No. 69279, supra note 5, at 1.
 For a thorough discussion of the NLRB’s stance on social media policies, see Goodwin Procter’s Labor & Employment Alert, “NLRB Report Provides Guidelines for Social Media Policies,” June 8, 2012.
 See, e.g., Zipcar, Inc., Form 8-K, Ex. 99.3, Jan. 2, 2013; Zipcar, Inc., Form 8-K, Ex. 99-1, Jan. 3, 2013.
Deborah S. BirnbachPartnerCo-Chair, Complex Litigation & Dispute Resolution
R. Todd CronanPartner
Lisa R. HaddadPartnerCo-Chair, Public M&A / Corporate Governance