Social media is a benefit and nuisance for public companies. On one hand, websites such as Facebook and Twitter offer a free, quick, and easy way to promote services, raise interest, and build rapport with the public. On the other, they increase the risk of getting on the wrong side of the U.S. Securities and Exchange Commission (SEC).
In the past, communication from a company would generally come in the form of a press release that is carefully prepared and vetted by legal experts before getting distributed. Social media and technology have changed all that. Nowadays, a company employee can send an informative, off-the-cuff remark into the world that may damage the company and individual's reputation.
Elon Musk—the owner of Tesla, Inc. (TSLA), SpaceX, and soon (maybe) Twitter, Inc. (TWTR)—is a classic example of a reckless social media user. Over the years, the billionaire entrepreneur's controversial tweets have significantly affected asset prices and made him an enemy of the SEC—the government agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation.
Musk's eagerness to share his opinions on social media has led many investors to wonder where exactly the securities regulator draws the line. In this article, we give an overview of everything you need to know about SEC rules for public company social media use.
- The SEC was slow to provide guidance on how companies and executives can use social media.
- A 2012 Facebook post from Netflix CEO and co-founder Reed Hastings prompted the regulator to finally offer some clarity.
- Publicly traded companies can publish earnings and other material information on social media, provided that investors know to expect it there.
- Companies and their executives must also be careful when liking or sharing a post, publishing a link from a third party, or friending certain individuals.
- Social media posts must be accompanied by additional disclosures or cautionary statements when necessary.
Regulation Fair Disclosure
One of the most important things to be aware of is Regulation Fair Disclosure, or Reg FD for short, which is a law that prohibits selective disclosure by public companies to market professionals and certain shareholders.
Reg FD was initially rolled out in 2000 to prevent a limited group of individuals from unfairly getting access before others to material nonpublic information that affects share prices. The law, which was principally designed to level the playing field between individual investors and institutional investors, states that if such a selective disclosure is made, the company must quickly or simultaneously make that information available to the rest of the public.
Internet and Social Media
As technology changed, Reg FD needed updating. In 2008, with the internet age in full swing, the SEC issued new guidance stating that information can be distributed on websites provided that shareholders, investors, and the market as a whole are aware that it is the company's "recognized channel of distribution."
Then, in April 2013, the regulator gave its blessing for publicly traded companies to publish earnings and other material information on social media, provided that investors know to expect it there.
This clarification arrived after Netflix, Inc. (NFLX) co-founder and CEO Reed Hastings controversially revealed for the first time on Facebook that Netflix viewers had consumed 1 billion hours in a month. Hastings got into trouble because his Facebook page hadn't previously disclosed performance statistics and investors were not informed that this channel would be used to divulge potentially important company-related information in the future. Hastings and Netflix also failed to immediately report the same progress report to everyone else through a press release or Form 8-K filing.
Companies that publish nonpublic material information on social media need to be sure that investors and the wider market are aware that it will appear on the platform beforehand.
Hastings ultimately was cleared of any wrongdoing. However, his post prompted the SEC to clarify how public companies can use social media and basically make clear that existing security regulations would be applied to websites such as Facebook, LinkedIn, and Twitter.
Regulation FD generally applies to directors and senior executives, investor relations and public relations officers, or other agents or employees in regular communication with investors and market professionals.
Company employees can also get into trouble for liking or sharing a post, publishing a link from a third party, or friending certain individuals. Any of the above can be viewed as an official endorsement or a means to indirectly convey material information.
For example, befriending a securities research analyst could potentially imply that the individual is privy to more information than peers about the company. Alternatively, sharing a link to an article insinuates that its content reflects the company's view, which can be particularly dangerous if that same article is later changed and ends up misleading investors.
The SEC generally requires certain company-related information to be accompanied by additional disclosures or cautionary statements.
When company news is unveiled in press releases, the legal team makes sure this information is included. Social media has complicated this process, increasing the chance of information getting shared with the world without being vetted first to ensure that it contains all the necessary disclaimers.
Character limits on websites such as Twitter can also pose an issue here. When there are limits on how much can be written, the boring fine print tends to get omitted.
Companies in the process of going public or issuing new shares need to be particularly careful about what they say on social media. The SEC has indicated that statements made through electronic means can be construed as written offers.
What Is the Name of the SEC Regulation That Requires Public Companies to Share Information With All Investors at the Same Time?
Regulation Fair Disclosure, or Reg FD for short, is designed to make sure that material information related to a company is made available to everyone at the same time. Should information be released accidentally to a select few people, everyone else should be informed of it immediately after via the company's main channels of communication.
What Is 8-K Reg FD Disclosure?
Form 8-K is filed by public companies to notify their shareholders and the SEC of an unscheduled material event.
What Is the SEC Marketing Rule?
The SEC's marketing rule determines how financial advisors can advertise their services. Recently, advisors were permitted to use testimonials and reviews in their marketing. However, they still cannot ask clients to write reviews for their social media pages, pay for positive reviews, or edit or hide negative reviews.
The Bottom Line
The SEC is gradually offering more clarity on how companies and their tweet-happy executives can use social media. Over the past few years, the regulator has made it clear that existing security regulations apply to these platforms as well and issued guidance in instances where further clarification was required.
Perhaps the biggest issue is how the law is enforced. Fines and other punishments tend to be modest and haven't always been sufficient enough to discourage rich executives from flouting the rules.