Delivering non-public material information through Internet-based social media, especially social networking sites such as Facebook, LindedIn, and Twitter, means that this information will first reach only a fraction of the investing public -- those who “follow” the company using those platforms. As illustrated by the hypothetical below, this may create a potential “Reg FD” issue for a public company. As we addressed in a previous blog, the SEC has recently issued guidance to investment advisers concerning their use of social media. Click here for prior blog. We have also addressed in a previous blog that FINRA, too, has issued Regulatory Notices which make it clear that member firms are expected to have policies and procedures in place that cover the use of social media by the firm and its associated persons. Click here for prior blog. While direct guidance to public companies on the use of social media to report a company’s material financial matters has yet to issue, this post offers suggestions for avoiding pitfalls in this regard.
The Scene: The CEO of Awesome Widgit Inc. just received his company’s yet to be released first quarter earnings report showing unprecedented profits from this winter’s hot new gadget, the Widgitslicer. In his excitement, he grabs his mobile device and tweets to all Widget Inc.’s followers: “First quarter profits are out! Earnings up 5%!!!”
The Issue: Every officer, director, senior employee and investor of a public company should know that the disclosure and timing of a public company’s material financial details are highly regulated by, among other entities, the SEC, state securities agencies, and self-regulatory organizations (like FINRA and national exchanges). In less than ideal circumstances, inadequate disclosures can trigger investigations and enforcement actions not only by the foregoing regulators, but also lead to prosecution by the U.S. Department of Justice and/or state attorneys general, as well as private investor lawsuits. A large portion of a corporate securities lawyer’s time is devoted to ensuring that a company’s disclosures not only come with the appropriate disclaimers, but also that such disclosures do not run afoul of the SEC’s Regulation Fair Disclosure (commonly referred to as “Reg FD”). Essentially, Reg FD mandates that when an issuer, or a person acting on behalf of the issuer, discloses material nonpublic information to certain enumerated persons (generally, securities market professionals and security holders who may trade on the basis of the information), it must make public disclosure of that information simultaneously (for intentional disclosures), or promptly (for non-intentional disclosures). The SEC’s stated purpose of Reg FD is to “address the selective disclosure of information by publicly traded companies” and “aims to promote the full and fair disclosure.”
A Potential Solution: A public company can take advantage of social media platforms simply by ensuring that their message is being simultaneously delivered to a wider audience instead of to a fraction of subscribers to a particular social media platform. Companies can have their lawyers (in-house or outside counsel) and investor relations staff coordinate to file a Form 8-K with the SEC and, for example, “tweet” a headline concerning the information in the 8-K to its Twitter followers. Services such as “StockTwit” or a similar platform will also allow businesses to attach lengthy postscripts to their tweets and other online messages with the language necessary to comply with the various disclosure rules mandated by the SEC.
In light of the foregoing, initially, it is a good idea for public companies to have documented policies and procedures concerning the use of social media, which include compliance and legal review and a designated corporate “voice” to deliver the messages (such as its investor relations department). Indeed, as the SEC clearly signaled to investment advisers and FINRA to its members, the adoption of policies and procedures governing the use of social media sites is a prudent exercise -- this advice translates equally to public companies.
Elizabeth Ann Fitzwater is Counsel to the Gibbons Business & Commercial Litigation Department and is a member of the Gibbons E-Discovery Task Force.