The long arm of the federal securities laws is embracing evermore tightly statements made on social media by participants in the public securities markets. The most recent evidence of this is the Schedule 14A filing made by Carl Icahn last week to report his tweet that “Twitter is great. I like it almost as much as I like Dell.” This is just the latest chapter in the extension of the federal securities laws to the world of social media.
Social Media and Reg FD. Back in December 2012, the SEC made clear that it viewed social media communications as fair game for its enforcement actions. It investigated Netflix and its CEO when the CEO stated on his personal Facebook page that Netflix members had watched more than 1 billion hours of video that month. Netflix’s stock price immediately jumped, prompting the Commission to investigate whether Netflix and its CEO had violated Regulation FD, which prohibits public companies from disclosing material non-public information to investors, analysts or other market participants without also simultaneously making that information known to the broad market.
The SEC’s position on how to broadly disseminate material information has been slowly evolving. Originally, they only recognized formal SEC filings and broadly disseminated press releases as acceptable methods. Then in 2008, the SEC published guidance on when posting material information to a company website would be considered “public disclosure” for purposes of Reg FD. The SEC advised that the question of whether website disclosure is public hinges upon, among other key factual inquiries, whether a company website is a “recognized channel of distribution” – which in turn depends on “the steps that the company has taken to alert the market to its website and its disclosure practices, as well as the use by investors and the market of the company’s website.”
With respect to the Netflix CEO’s personal Facebook update, however, the SEC was evidently concerned that such a posting, without more, was not broad dissemination for Reg FD purposes. After concluding its investigation in April of this year, the SEC neither initiated an enforcement action against Netflix or its CEO, nor alleged wrongdoing. The SEC instead issued a report saying it would allow issuers to use social media channels to announce material non-public information in compliance with Reg FD, as long as they first notified investors in traditional SEC filings, press releases or on the company’s website that the information is being released in this manner. (Importantly, while Netflix had previously alerted the public that it might disclose important information via the company’s own website, Facebook page, Twitter feed and blog, it had not previously indicated that material Netflix news might be released through the CEO’s personal Facebook page.)
Social Media and Proxy Solicitation. The filing by Carl Icahn was not triggered by Reg FD requirements, which are only applicable to the issuer of securities, but rather by the SEC’s proxy solicitation rules. Because Icahn and his partner, Southeastern Asset Management, Inc., are in the process of soliciting votes against the proposed buy-out of Dell Computers being led by Michael Dell, all of their written communications that are intended to “solicit” a proxy are required to be filed with the SEC as additional proxy soliciting material. The SEC has interpreted what constitutes soliciting a proxy extremely broadly. It covers any communication, whether material or not, that is intended (or reasonably likely under the circumstances) to influence a shareholder vote. Since social media is a writing, just as is a press release, any statements on social media with such an intent or likely effect are, so the theory goes, subject to the SEC proxy filing rules.
It seems questionable whether “I like Dell” is reasonably likely to influence a vote, but it is less questionable what Ichan’s likely intentions were in saying it. In any event, Icahn’s securities lawyers were clearly playing it safe, and appropriately so, given the significant downside of a misstep in an uncertain area.
Zipcar also played it safe in January 2013 when it filed an 8 K disclosing a tweet by its CEO that contained a link to a newspaper article favorable towards the company. This took place after Zipcar had announced that it was being acquired by Avis Budget Group for $500 million and was as a result subject to the proxy solicitation rules.
Social Media and “Gun Jumping”. Another extension of the federal securities laws to social media is in the context of a public offering of stock. A public offering could be a sale of securities for cash or an acquisition of another company where some portion of the purchase price consists of securities. A company engaged in a public offering is subject to numerous regulations under the Securities Act of 1933, as amended, including prospectus delivery requirements and “gun jumping” rules. As a result, any written statement promoting the value of the company or its stock is considered to be an offer of the stock and thus may need to be included as part of the prospectus filed with the SEC in registering the offering.
Similar to the proxy solicitation context, the SEC has defined very broadly the type of conduct that constitutes an offer for disclosure filing purposes. The most famous example of this was when the co-founders of Google gave a wide-ranging interview to Playboy magazine on the eve of the Google IPO. The company succumbed to SEC pressure and filed the interview in its entirety as part of the prospectus, rather than accepting a ‘cooling off period’ delay of the offering to let the impact of the information in the interview subside.
Securities practitioners now recognize that statements on social media could constitute an offer of securities that are in registration, just as easily as any other public written pronouncements. As a result, it has become more common practice for securities lawyers representing issuers that are engaged in public offerings of securities, whether in the context of a merger or capital raising transactions, to warn their clients to stay off of social media with any discussion regarding the transaction taking place or the value of the company. This is similar to the realization by securities lawyers from an earlier era that a company undertaking an IPO needed to scrub its website to remove any information that might be considered as promoting its securities.
The applicability of SEC disclosure regulations to social media is continuing to expand as the popularity of this media explodes, along with its influence on the flow of information in the capital markets. Caution is advisable as the SEC continues to refine its positions on how to treat the impact of that phenomenon.