Investor Relations in the Social Media Age
By Frank Aquila & Sarah Payne, Sullivan & Cromwell LLP
Over the past few years, companies’ use of corporate blogs and social media sites to communicate with members of the investment community has grown significantly, to the point that some companies have abandoned traditional media outlets for release of their earnings announcements. On April 2, the SEC confirmed that social media channels can be Regulation FD-compliant means of communicating material non-public information, so long as the public is adequately notified of the use of that channel for that purpose. Although the SEC’s recent announcement is unlikely to result in a rush of companies using social media as the sole means of communicating material non-public information, use of these communication tools by a company’s IR and PR departments is likely only to intensify in the future.1
Investor relations departments are rightfully focused on getting their companies’ messages out clearly and quickly; as a consequence, they may be frustrated by legal restrictions that seemingly conflict with the corporate disclosure goals of transparency, clarity and plain English. At the same time, because these forums are real or near-time communications that can survive indefinitely, with little or no ability to fix errors, and are often in abbreviated formats, corporate legal departments need to work closely with IR and PR departments to craft appropriate guidelines. Complicating matters is the fact that existing legal frameworks were not drafted with these new forms of communication in mind. This simply means that lawyers will often have to be creative in forging a path through social media that does not run afoul of legal requirements while at the same time meeting the company’s investor relations objectives. Challenging for sure, but no doubt achievable.
This article briefly presents some issues for legal and investor relations teams to consider as they seek to increasingly use social media to communicate with investors.
Focus on Brevity
One of the key challenges of many web-based forums and communications, whether it be corporate blogs, Facebook, Twitter or other sites, is the focus on brevity. Brevity can of course enhance investor understanding and be consistent with plain English disclosures; messages that are too short, however, can be confusing and, when taken out of context, could be misunderstood by investors. For example, Twitter limits each individual tweet to 140 characters, and although one could break up a message into multiple tweets, each tweet may be read separately and re-tweeted. Accordingly, each message should stand alone or be placed in a context such that it is clearly part of a longer message. Moreover, the summary nature of the communication should be obvious to readers; if it is not, a cautionary note (or link to a cautionary note) may be warranted. If the tweet or blog posting is commenting on or summarizing a press release or an earnings call, it may be helpful to include a link to the full text of the press release or the webcast itself.
On Dec. 6, 2012, Netflix announced that both it and its CEO, Reed Hastings, had received a Wells Notice from the Staff of the Securities and Exchange Commission indicating the Staff’s intent to recommend to the SEC that it institute an enforcement proceeding against Netflix and Hastings for violations of Regulation FD, the SEC’s rule regarding selective disclosure of material non-public information. In June 2012, the company posted on its blog that Netflix members were enjoying “nearly a billion hours per month” of Netflix. In early July, Hastings publicly posted on Facebook to the subscribers who follow him (which he indicates is more than 200,000) that Netflix members had “enjoyed over one billion hours in June.” The Wells Notice related to Hastings’ July Facebook post. Hastings noted in his public statement regarding the Wells Notice that “there was press coverage as there are many reporters and bloggers among you, my public followers. Some of you re-posted my post… ” and argued that not only did the statement not constitute “material” information, but even if it did, the Facebook post was a public, rather than selective, disclosure, for purposes of Regulation FD.
On April 2, the SEC announced that it was not initiating an enforcement action or alleging wrongdoing by Netflix or Hastings. In its press release, the SEC noted that there was market uncertainty regarding the application of Regulation FD and existing guidance (contained in an August 2008 interpretive release2) to social media sites; to address this concern, the SEC issued a report of investigation (the “Report”) in an effort to provide additional guidance.3 As discussed below, the Report confirms that the SEC’s August 2008 interpretive release can be applied to social media channels and that the touchstone of the analysis is whether the public has sufficient notice that such channel will be used by a company for disseminating material non-public information.
August 2008 Interpretive Release
The August 2008 interpretive release provides the following non-exclusive factors for assessing whether information posted on a company’s website is public for purposes of allowing a subsequent selective disclosure of that same information:4
- the design of the website and whether important information is prominently disclosed in the location known and routinely used for such disclosures, and whether the information is readily accessible to the general public;
- the extent to which investors and the market are made aware that this is the way in which the company intends to make public material information and whether the company has a pattern or practice of posting such information on its website;
- the extent to which information on the website is readily picked up by the market and reported in the media, or the extent to which the company has advised news wires and the media about such information, as well as the size and market following of the company and how quickly the market absorbs this information;
- the steps the company has taken to make its website and the information accessible, including through the use of “push” technology or releases through other channels to widely distribute such information or advise the market of its availability;
- the extent to which information on the website is accurate and current;
- whether the company uses other methods in addition to its website posting to disseminate the information and whether and to what extent those other methods are the predominant methods the company uses to disseminate information; and
- the nature of the information.5
The release also indicates that companies should evaluate whether investors and the market have been afforded a reasonable waiting period to react to the information before making a subsequent selective disclosure of the information.6
Additional Guidance in the 2013 Report on Investigation
In the Report, the SEC emphasizes that the August 2008 interpretive release remains relevant in analyzing whether a social media channel is a “recognized channel of distribution.” The Report notes that issuers must not only take steps to alert the market about which channels of communication it will use, but also inform the market about the types of information that may be disclosed through a particular channel. The Report emphasizes the importance of providing the market with the opportunity and means to subscribe to, register for or review the particular channel. The SEC gives as an example disclosure on a corporate website that identifies the particular social media channels that the company intends to use for dissemination of material non-public information. Any such disclosure, whether it is through a corporate website, SEC filings and/or press releases, should be issued well in advance of use of the channel for that purpose. Based on the August 2008 interpretive release, other important factors may include the extent to which the medium has a sufficient number and type of followers, how easily material information can be gleaned from the medium (e.g., is the material information buried in a sea of Twitter posts about topics the investment community would otherwise ignore7) and the extent to which such information is quickly and widely picked up by the press.
In addition to addressing the extent to which social media can be used for the disclosure of material non-public information, the Report also emphasizes that communications through social media, even though not “private”, may nevertheless constitute a selective disclosure in violation of Regulation FD. The Report reminds companies that Regulation FD applies whenever a disclosure of material non-public information is made to securities market professionals or securityholders,8 even if there is no intent to selectively disclose information to these enumerated groups. Accordingly, if a particular social media channel is not sufficiently “public” for Regulation FD purposes, disclosures through a channel that could include securities market professionals or securityholders need to be carefully analyzed under Regulation FD to ensure that such disclosure does not constitute the disclosure of material and non-public information.9
As discussed above, the SEC did not initiate an action against Netflix or Hastings, or allege any wrongdoing. The report does note, however, that although each case must be evaluated on a facts and circumstances basis, dissemination of material non-public information on a personal (rather than corporate) social media site by an executive officer of a company, without advance notice that the site will be used for such, is “unlikely” to meet the requirements of Regulation FD. The SEC believes this is the case even if the particular individual has a large number of subscribers, noting that it is unlikely that investors would assume that personal media sites would be a channel through which the company would be disseminating material non-public information.
Just as most companies have not used their websites as the sole source of material non-public information, it is unlikely that most companies will immediately begin using social media in a similar manner. This does not mean, however, that a company should abandon use of web-based communications. Rather, companies should ensure that these types of communications are part of their Regulation FD compliance program, and as with any corporate communication, take steps to prevent disclosure of material non-public information in a manner that violates Regulation FD. As companies are well aware, this requires close and frequent contact among the legal, IR and press departments to ensure that anyone who may be blogging or sending similar communications understands not only the information about the company that is already in the public domain, but also the type of information that may be viewed as material. This is particularly important in the case of a company representative who may be live-blogging or tweeting an earnings call or other public announcement. In that environment, the individual may be creating statements real-time in response to an unscripted analyst Q&A session, as opposed to blogging about the company’s prepared remarks that were provided to the representative in advance. It is crucial that the representative understand the types of company information that, if shared, could run afoul of Regulation FD.
Public blog entries, tweets or other communications that disclose or repeat earnings or other financial information also will need to be monitored for Regulation G non-GAAP financial measure compliance. Even repetition of previously disclosed non-GAAP financial measures could be considered public disclosure of non-GAAP information, and companies will need to include the corresponding GAAP measure and appropriate reconciliations. The SEC’s rules do not specifically contemplate these types of communications and therefore do not address the required format or location of the reconciliation. Nevertheless, it should be reasonable to rely on links to the company’s website that contain the required reconciliations.
Liability for Information
Web postings by corporate representatives could subject companies to liability under the antifraud provisions of the securities laws, including Rule 10b-5 under the Exchange Act. The SEC’s 2008 Interpretive Release cautions that companies cannot avoid liability for such statements by having employees who are acting as representatives of the company purport to speak in their “individual” capacities. Legal and investor relations departments should work together with corporate bloggers and others to ensure that an accurate and consistent corporate message is being published. To the extent that errors are identified in corporate communications, including in blogs or Facebook or Twitter posts, steps should be taken to correct the communication or post an update as soon as possible. Especially in the case of earnings or other material announcements, investor relations departments should take steps to coordinate the various corporate communications so that sources (whether it be blogs, websites or others) are aligned from both a content and timing perspective.
Companies seeking protection under the securities laws for forward-looking statements may also wish to include a forward-looking statement legend, or a link to a legend, in connection with their web-based communications.
Finally, executive officers and other company representatives should be mindful of these issues in all of their web-based (and other) communications. The ubiquity of social media means a greater overlap of an individual’s personal and work lives, with increased opportunities to make statements that could embarrass, or worse, create liability for, the individual and the company.
In certain special situations, legal departments may have to place additional restrictions on corporate web-based communicators, consistent with restrictions placed generally on corporate communications. Given the interactive nature of many web-based communications, legal departments may find that it is more difficult to control these types of communications. Corporate bloggers and others also may find it challenging simply to ignore significant events happening in a corporation’s life. However, in situations such as securities offerings, proxy contests, tender offers or acquisitions, communicating about the event or, in the case of securities offerings, issuing communications that may be viewed as offers under the securities laws, could potentially be problematic in light of legending and filing requirements, or in some instances, strict prohibitions on such communications. Accordingly, before any type of special corporate event, it will be important for all constituencies (legal, IR and PR) to have a collective communications gameplan, with sufficient guidance to help those on the public communications “front line” respond as appropriate on a real-time basis.
Although to some it can appear that legal limitations present significant challenges to reaping the benefits of social media, that need not be the case. With care, creative thinking and frequent communication among the legal, investor relations and public relations departments, new media can contribute to fulsome investor communications and improved corporate transparency. As the power of social media grows and expands, it will no doubt become increasingly relevant to businesses and their investors. As lawyers, we are key to facilitating the proper use of these new communication outlets to meet the company’s investor relations agenda.
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Frank Aquila (firstname.lastname@example.org) is a partner in the Sullivan & Cromwell LLP Mergers & Acquisitions Group, resident in the firm’s New York office. His practice focuses on mergers, acquisitions, strategic alliances, and corporate governance matters for large multinational corporations.
Sarah Payne (email@example.com) is a partner in the Sullivan & Cromwell LLP Mergers & Acquisitions and Securities Groups, resident in the firm’s Palo Alto office. Payne has a broad-based corporate practice advising clients on corporate governance and regulatory compliance issues, as well as on a wide range of transactions, including public and private securities offerings, acquisitions of public and private companies, and takeover defenses.
The views expressed in this article are their own and do not necessarily reflect the views of Sullivan & Cromwell LLP or its clients.
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