The SEC's Rules and Regulations on Social Media Use

Social media is both a benefit and a 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, these platforms increase the risk that an employee or executive could trigger unwanted attention from the U.S. Securities and Exchange Commission (SEC).

The eagerness of employees and executives to share opinions on social media has led many investors to wonder where the securities regulator draws the line. Learn more about rules the SEC has made for social media use by publicly traded companies.

Regulation Fair Disclosure

One of the most important things to be aware of is Regulation Fair Disclosure, or Reg FD for short. This law prohibits selective disclosure by public companies to market professionals and certain shareholders.

Reg FD was initially rolled out in 2000 to ensure everyone has access to material nonpublic information that affects share prices. The law, principally designed to level the playing field between individual 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

In the 2000s, the internet exploded, and social media platforms became a quick way to reach a vast audience. Companies were encouraged by marketing strategists to create social media profiles to reach more customers. As more businesses created a presence on these platforms, it became apparent that Reg FD needed an update.

In 2008, with the internet age in full swing, the SEC issued new guidance stating that information could be distributed on websites provided that shareholders, investors, and the market as a whole were aware that it was the company's "recognized channel of distribution."

This clarification arrived after it was revealed via a Facebook post that Netflix, Inc. (NFLX) viewers had consumed one billion viewing hours in a month. This 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. Netflix also failed to immediately report the same progress report to everyone else through a press release or Form 8-K filing.

Endorsements

A company can also get into trouble if notable employees like or share posts, publish links from third parties, or become platform friends with specific individuals. Any of these actions 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.

Legal Disclaimers

The SEC generally requires certain company-related information to be accompanied by additional disclosures or cautionary statements.

The legal team ensures this information is included when company news is unveiled in press releases. Social media has complicated this process, increasing the chance of information being shared with the world without undergoing a vetting process to ensure it contains all the necessary disclaimers.

Character limits on some websites can also pose an issue here. When there are limits on how much can be written, the boring fine print tends to get omitted.

Public Offerings

Companies in the process of going public or issuing new shares need to be particularly careful about what they say on social media. This is because the SEC has indicated that statements made through electronic means can be construed as written offers.

The Bottom Line

The SEC is gradually clarifying how companies and their tweet-happy executives can use social media. Over the past years, the regulator has made it clear that existing security regulations also apply to these platforms 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 to discourage wealthy executives from flouting the rules.