The U.S. Securities and Exchange Commission issued guidance yesterday permitting companies to use social media sites including Facebook Inc. and Twitter Inc. to communicate company announcements. The guidance came as part of a report detailing its investigation into Netflix Inc. Chief Executive Officer Reed Hastings, who in July posted monthly viewership results on his Facebook page rather than in an SEC filing or news release.
The SEC refrained from bringing an enforcement action against Hastings or Netflix, which runs a subscription service for watching television programs and movies, because rules around using social media for company disclosures had been unclear, the agency said.
"Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don't know that's where they need to turn to get the latest news," George Canellos, acting director of the SEC's enforcement division, said in a statement.
The SEC confirmed that a regulation prohibiting companies from disclosing material information to select investors applies to social media and other emerging means of communication the same way it applies to company websites. Company communications made through social media channels could constitute a violation of the fair disclosure rule known as Regulation FD if investors had not been told in advance where the information would be posted, the SEC said.
'A Good Thing'
Social media "has tremendous potential to level the playing field for participants in the markets," said Stephen Diamond, a securities law professor at Santa Clara University's School of Law. The report "shows a commission that's being flexible and responsive, and it shows a government agency that actually thinks innovation is a good thing."
Some investor advocates are less sanguine about the policy change. Lynn Turner, a former chief accountant at the SEC, called it "bad policy" because it will disadvantage investors who don't use Facebook and Twitter.
"Many investors, especially those over 50, who in the aggregate have the most invested, still do not use social media," Turner said in an e-mail. "Telling someone who does not use Twitter to go to Twitter for significant investment information is one of the dumber ideas I have heard."
Jim Prosser, a spokesman for San Francisco-based Twitter, declined to comment.
"We welcome, and certainly agree with, the SEC's finding that Facebook is an established means for companies and individuals to share and disseminate information broadly," Menlo Park, California-based Facebook said in a statement.
While the agency didn't explain exactly how a company should inform investors about social media use, the new guidance will give companies greater comfort in communicating with investors via Facebook and Twitter, said David Katz, a partner at law firm Wachtell, Lipton, Rosen & Katz.
"Do I see it as a sea change? No," Katz said in a telephone interview. "But investor relations has moved into the 21st century and the SEC has caught up."
Hastings stirred controversy over SEC disclosure guidelines when he wrote in a July 3 post on Facebook's website that viewing on Netflix's video-streaming service had "exceeded 1 billion hours for the first time" in June. The incident led to calls for the SEC to broaden its rules to allow social media to be used to communicate to investors.
In December, Hastings and Netflix each received a Wells Notice, indicating SEC staff intended to pursue enforcement action in the matter. That same month, Hastings said that posting to his Facebook contingent of 200,000 followers "is very public."
Netflix said it welcomed the SEC's guidance. "We appreciate the SEC's careful consideration and resolution of this matter," spokesman Joris Evers said in a statement.
Gene Goldman, a partner at law firm McDermott Will & Emery LLP, said the report provides companies a road map for staying out of trouble.
"But the next time material information is disclosed on an executive's Facebook page without the company alerting all shareholders to look there for information, the matter will likely be met with an SEC lawsuit instead of a report," Goldman said.