In 2007 the Securities and Exchange Commission said that companies no longer needed to send printed proxy materials to investors, but could mail a postcard with the web address for those documents instead. Considering that most investors had begun checking corporate filings on the Internet years earlier, the rule change was long overdue and the SEC was perceived to be lagging behind the communications curve.
But that perception may be changing today. Two recent moves by the SEC would suggest the Commission is still going to be the deliberative regulator that it has been, but with a greater effort to keep pace with the changing communications times.
In July the Commission implemented a provision of the JOBS (Jumpstart Our Business Startups) Act by lifting its ban on mass marketing private securities offerings. As of September companies can raise money from investors by advertising private securities to the general public via the Internet or social media such as Facebook or Twitter.
Also this spring the Commission put out a report that said companies can use social media to make “material, nonpublic information” announcements, such as earnings reports or forecasts, as long as they have established whatever platforms they choose as recognized channels of distribution.
The guidance on using social media to publicly disclose corporate developments showed a more responsive Commission. Its report was prompted by a posting last summer on the private Facebook page of Reed Hastings, the chief executive of Netflix, congratulating the company’s chief content officer when Netflix’s monthly viewing exceeded 1 billion hours for the first time. Additionally the Netflix post also included a less-than-formal forecast when he wrote “When House of Cards and Arrested Development debut, we’ll blow these records away.”
The Netflix Facebook posting was contrary to the spirit of the Regulation FD guidance the SEC issued in 2008 regarding the disclosure of material information on company websites. Under Regulation FD, public companies generally may not selectively disclose material nonpublic information to certain parties when it is reasonable to assume that they will trade on that information prior to public disclosure. The problem for Netflix was that the CEO’s Facebook page was not a channel through which it typically released corporate information. So investors were not looking to that location for company news.
No action was taken by the SEC against Netflix, but the Commission’s subsequent report said social media such as Facebook or Twitter may be used to meet Regulation FD purposes, but it must be established as a recognized channel of distribution similar to a web site or press release.
While all of this suggests a Commission that is upping its communications savvy, there are still bugs to be worked out. A “recognized” channel of distribution is unclear. Companies essentially train their investors to receive their corporate information by establishing a track record. For example, in a current report on Form8-K, Netflix listed numerous locations where it might post material nonpublic information. But that doesn’t establish any of them as a recognized channel of distribution, since you can’t expect people to check five or six places regularly.
If a company really wants to use a personal Facebook account to disclose information, then it needs to keep using it and establish a pattern. The challenge for companies will be to determine when they can be comfortable only posting on Facebook or Twitter and no longer use just a press release or an SEC filing.
Then there’s the challenge of dealing with mandatory language in an era of micro-blogging. The SEC needs to agree to a new way of including boilerplate information in social media postings. When companies make quarterly earnings announcements, they typically include warnings about forward-looking statements and other legalese that includes risk factors that could undermine earnings expectations. Such language is too long to fit into a 140-character tweet. But Twitter might be a channel that companies feel could be an appropriate way to reach their investors. It would be helpful if the SEC would allow the use of hyperlinks for disclaimers, warnings and reconciliations, thereby removing the worry about complying with securities laws in 140 characters.
Historically the SEC has acted slowly when adopting rules changes to accommodate technology and no doubt there will be parties who believe the SEC still moves at a glacial pace. The SEC’s practice in the past has been to see the practical impact of changes before revising rules. The JOBS Act provision, for example, was ordered by Congress and in fact took the SEC nearly a year beyond a deadline set by Congress to produce a new rule. But it’s likely the Commission was already planning on a revision of this sort to be more in tune with the needs of companies for the financial health of their businesses and not just for advertising.
While it’s fair to say the Commission still takes measured steps, it appears that staying abreast of the communications curve is now on its agenda. That’s good news for companies and investors at a time when they can speak to each other in more ways than ever before.
Howard E. Berkenblit is a partner and leader of the Securities and Corporate Governance Group at the law office of Sullivan & Worcester in Boston.