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The SEC Opens the Door for Companies to Use Social Media
Posted on May 6th 2014
The Securities and Exchange Commission (SEC) says it's okay for companies to use social media, such as Facebook and Twitter, to announce important information and still comply with the Regulation Fair Disclosure. A recent ruling confirms that Regulation Fair Disclosure applies to social media used by companies the same way it applies to company websites. In 2008, the SEC clarified that companies can use websites to reach investors if the investors have been informed that important information is transmitted via website.
The new ruling states that companies can treat social media as a legitimate outlet for communication so long as the company makes clear which Twitter feed or Facebook page will serve as potential outlets for announcements. It's likely companies will need to use traditional media to advise investors which social media outlets they will use. The SEC also stated that a corporate executive’s personal Facebook page as opposed to a company’s social media page will not be a channel where companies will be allowed to make important announcements.
Currently, only 14% of companies use social media, according to a 2012 Conference Board and Stanford University study, so implementation may be challenging. And, companies will still have to be mindful of the issue of materiality.
Dell and eBay have already been using Twitter to announce financial and other key information to investors. These companies usually simultaneously send out new releases or report information in filings with the SEC. With the new SEC rules, it will make it easier for companies to use social media.
Why Did The SEC Issue A Ruling About Social Media?
This change came after Netflix’s Chief Executive, Reed Hastings, boasted on a social-media site that the streaming video company had exceeded one billion hours in a month for the first time, sending the firm’s shares higher. Mr. Hastings posted this on his personal page.
The SEC opened an investigation in December to determine whether this announcement violated the rules that ban companies from selectively disclosing information. Previously, Mr. Hastings had not used Facebook to make important announcement and had not told the public he would be making announcements on his personal Facebook page.
In his defense, Mr. Hastings did have 200,000 subscribers to his personal page making it, what Mr. Hastings interpreted to be, a very public forum. The commission decided it would not pursue civil charges against Mr. Hastings and instead issued this new ruling. "An increasing number of public companies are using social media to communicate with their shareholders and the investing public," the SEC said in its report. "We appreciate the value and prevalence of social media channels in contemporary market communications, and the commission supports companies seeking new ways to communicate."
The fair disclosure rules require companies to release information in ways that don't give an advantage to one group of investors over another. It will be interesting to see how investors respond to this ruling. There's been no indication that investors are overwhelmingly in favor of receiving information via social media channels.
Lona Nallengara, Acting Director of the SEC’s Division of Corporation Finance, said, “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.” I applaud the SEC for attempting to catch up with the times. only time will tell how this pans out.