Companies now allowed to disclose info via social media

But did the SEC just open up the risk for fraud?

With the rise of social media, the world now moves at a blinding pace. Information is spread incredibly quickly and easily these days (which, of course has both its upsides and its downsides, e.g. bullying). So if you're a big company, and you've just accomplished some major feat, such as when Facebook reached one billion monthly users, you want to let people know as quickly as possible. And social media is the way to do it.

But here is the problem: what if you are a public company, and you have investors to worry about? How do you make sure that they are also able to get that information in time to make an informed decision on how to move their money, when most of them are used to getting their information from more traditional methods, such as a press release or a Form 8-K filing? 

The Securities and Exchange Commission (SEC) has solved the problem, announcing Tuesday that it was giving the greenlight to companies that want to announce key information via social media, as long as the company also informs investors at to "which social media will be used to disseminate such information."

“One set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information,” George Canellos, Acting Director of the SEC’s Division of Enforcement, said in a statement. “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.”

Though some might wonder why investors need to be informed if the social media account is large enough that the information will spread quickly anyway, byt the SEC said that this is still not good enough method of releasing information in an non-exclusive way.

"Although every case must be evaluated on its own facts," the SEC said in its report, the company has to inform investors of which accounts they will use "even if the individual in question has a large number of subscribers, friends, or other social media contacts, such that the information is likely to reach a broader audience over time."

The new policy stems from an investigation involving Netflix CEO Reed Hastings, who used his personal Facebook page to announce that Netflix had reached one billion monthly online viewing hours for the first time, instead of a press release or Form 8-K filing.

A press release was released later the same day, but it did not include the information about the viewing hours. No other company statistics had ever been released this way, and no one had informed investors that Hastings might use a personal Facebook account to do so.

The announcement of the milestone viewing hours had a positive effect on Netflix's stock, causing it to rise over $10. While the SEC did not take any action against Hastings or the company, it did force this change.

The social media report is an extension of SEC guidance from 2008, which stated that publicly traded companies were allowed to distribute information on their websites as long as they made it clear that the sites could be used to do so.

In 2000, the SEC adopted a “fair disclosure” rule, which required that companies had to immediately make public any important information shared with select groups of stock analysts and investors.

Potential problems

As with any ruling like this, there are those who worry about it causing potential harm or, even worse, fraud.

Social media is full of fake accounts that are meant to look like they are official. They can pretend to either be a famous person, or a company, as Chuck Jaffe of Marketwatch pointed out.

All a person has to do it is make an account pretending to be Netflix, or Facebook, and make a big announcement. The news will spread quickly and can cause investors to make decisions that are based on false information. Most will probably not fall for this, but enough might to cause problems down the road.

"Bad guys don’t need to move the market for long, they just need people who want to react in the blink of an eye, precisely the kind of folks who might react to something they see, well, in a social-media alert," said Jaffe.

Then there is the fact that there could be literally dozens of accounts where the information could potentially be announced, and who says that the investor would be checking the right account at the right time to get the information in a timely manner?

"Yes, Netflix now would need to tell investors about Hastings' personal Facebook account (assuming he still plans to use it for company disclosure purposes). But it also could just post a list of two dozen social media tools, and hope that investors happen to be checking the right one at the right time. Or that investors have created personalized alerts for all of them (likely requiring that they first create accounts)," Dan Primack of Fortune noted. 

The SEC is doing its best to keep up with the times, acknowledging the new ways that information is spread while also trying to protect investors from being left behind. There will be some growing pains along the way, though, while both sides get used to dealing with new technology.

(Image source: https://sociable.co)