Social Media and Disclosure: Promises and Pitfalls

When hackers briefly took over the AP's Twitter feed this week, the Dow plunged 130 points. The event highlighted the power of social media, and th...
David P. HooperApril 26, 2013

Given that Facebook and Twitter have been in wide usage for almost a decade, the Securities and Exchange Commission’s April 2 announcement that public companies may now use social media outlets to announce key information to investors felt “better late than never” to many public company executives.

But regardless of those who think regulators have been late to the game on social media issues, the SEC’s announcement could be a game-changer in how public companies disseminate material information to the investing public. With these promises, there are many legal and practical pitfalls public company executives, and particularly CFOs and their staffs, need to be aware of when using social media for disseminating information.

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To quickly recap, on April 2, the SEC issued a report of investigation under the Securities Exchange Act of 1934 concerning the use of social media by Netflix, Inc. and its CEO, Reed Hastings, to announce information about Netflix’s monthly online viewing numbers.

On July 3, 2012, Hastings used his personal Facebook page to announce that Netflix had streamed 1 billion hours of content in June 2012, a milestone never before achieved by the company. Neither Hastings nor Netflix previously released company information using Hastings’ Facebook page, nor did they file a press release or Form 8-K with the SEC disclosing the June online viewing numbers. Following the announcement, Netflix’s stock price rose from $70.45 at the time of the Facebook post to $81.72 at the close of trading the next day. The SEC opened an investigation into these actions and whether they complied with SEC Regulation FD, and concluded that no action should be taken against Hastings or Netflix because there was uncertainty about the application of Reg FD to social media.

Upon completion of its investigation, the SEC issued the report and used it as an opportunity to provide guidance on how disclosures should be made through social media channels. For the first time, the SEC clarified that companies can use social media sites to announce key information to investors in compliance with Reg FD. In this regard, companies can use social media as an information dissemination tool as long as investors have been alerted which social media channels will be used to disseminate the information. While Facebook and Twitter are the only two sites specifically referenced in the report, presumably the SEC also would bless information released through other sites, such as LinkedIn, YouTube, and even Instagram where many brands have thousands of followers and can exert influence.

The Netflix incident and subsequent investigation should teach CFOs that using social media to distribute company information can provide substantial benefits for issuers, their public perception and the movement of their stock prices.

Dangers of Using Social Media

While the SEC formally blessed social media use for disclosure announcements, there are numerous pitfalls CFOs must be mindful of when using social media to release material information.

  • Information must be complete and accurate.

Probably the greatest pitfall for companies is the inherently brief nature of social media posts. Under long-standing securities law principles, if a company chooses to make public statements, the law requires the statements to be materially complete and accurate. Twitter posts are limited to 140 characters and many use abbreviated language or acronyms. If a company chooses to release a statement on Twitter or Facebook, it must be careful the information is materially complete, accurate, and understandable. An important tip is to provide links in Twitter, Facebook or LinkedIn posts that direct users to a more complete statement on the company’s website. This is a crucial consideration for companies’ social media usage.

  • Make clear where users can access the information.

Even though social media use is pervasive, not everyone has a Twitter account or a Facebook page, and some may use their social media accounts more than others. As a result, companies need to inform the public whether they will be using Twitter, Facebook, LinkedIn, YouTube or another channel to release information and provide specific instructions on how to access the posts. Companies should list these access points in an 8-K, 10-Q, or 10-K, and also in the “Where You Can Find More Information” section of earnings releases and other SEC filings.

  • Companies must ensure broad distribution.

Reg FD requires that information disclosed under the rule must be disseminated through a method of disclosure that is reasonably designed to provide broad, nonexclusionary distribution of the information to the public. The key for public companies is that whatever social media is used, it must offer a broad distribution to the public.  The factors to consider include the nature of the company’s shareholder base, the target audience and whether it is likely the company’s audience has broad-based access to the company’s social media pages and accounts.

  • Information Security is more important than ever. 

Companies must be extremely vigilant regarding the security of their social media sites.  Inaccurate or false information released to the public through the unauthorized use of social media sites can lead to reputational damage, mistrust in the marketplace and potential lawsuits from aggrieved shareholders. These risks were evident this week, when hackers took over the Associated Press’ Twitter account, tweeting false information about an explosion at the White House which sent the Dow Jones Industrial Index plunging 130 points. Companies that decide to use social media need to have extremely tight security of their information systems, detailed policies and procedures on information security, and restricted access to company social media sites.

Benefits of Using Social Media

Public companies that are cautious in using social media to disseminate information may be able to realize the following benefits:

  • Speed of Information Dissemination.

Information disseminated using social media can be accomplished with amazing speed and efficiency. Companies will now be able to release important information, such as quarterly and annual earnings releases and transaction announcements, out to the market quicker than before. For CFOs, the speed at which important financial news about the company is distributed and acted upon by the market is absolutely critical.

  • The opportunity to reach a much larger audience.

Social media is a highly popular method of communication primarily for younger folks but more and more for people of all ages, and by all indications will continue to be so for the foreseeable future. CFOs can now release quarterly and annual earnings results through a Twitter post and reach a whole new audience of investors who may never have decided to find the information on their own by visiting the company’s website. By connecting with users at an early age, companies may be able to create a following that they otherwise would not have been able to access using more outdated forms of communication.

  • Direct and Immediate Market Reaction.

Information released via social media can be forwarded, commented on, and acted upon in real time.  Twitter users typically “re-tweet” posts they find interesting, and the comment feature on Facebook is heavily used. As a result, companies using social media can directly reach individuals in real time, and then immediately see their reactions.  For CFOs, this can be an immense benefit to gauge the market’s reaction to financial statement information, negative news regarding impairments or one-time charges and reactions to quarterly and annual guidance.


David Hooper is a partner at Barnes & Thornburg LLP, where he regularly advises clients on a variety of securities regulatory matters.