A Discussion of the Risks and Compliance Issues Associated with Using Twitter
In their article “Is Your Company Tweeting Towards Trouble?”, attorneys Julie Jones and Cynthia McMakin, discuss some of the risks and compliance concerns public companies need to consider when using Twitter. In particular they state
“Due to Twitter’s innovative, yet immediate and informal, nature, tweets made by public companies and their employees may create a higher risk of violating US securities laws because the substance of each tweet may not be as thoroughly vetted as information that is disclosed through traditional channels of communication. Twitter’s appeal as a tool for companies to use to quickly dispense information to the public heightens these risks”.
Some of the issues brought to light have been widely discussed in the IR world (i.e. Reg FD). However, they dig a bit deeper into other areas such as Exchange Act Rule 10b-5, which (like any other statement made by the company) would bind tweets by antifraud provisions. They also confer on how companies should handle information that resides on Twitter (i.e. can stale information be deleted and/or archived somewhere).
The ideas they present are very thorough. They even present some suggestions for combating these issues and provide a list of best practices at the end. It is worth the read, but I thought I would provide a rundown of the main ideas. Where applicable, I’ll also offer an Investor Relations (IR) perspective based on insights gathered from research Q4 has conducted on the use of Twitter for IR and in speaking with various IR professionals.
Reg FD
In a nutshell, an issuer must disclose material nonpublic information to everyone at the same time. As we know, the most common way to do this is via a broadly disseminated press release or on a publicized call or webcast to which access is provided to everyone. The article states that Twitter cannot substitute for other, more broadly used means for disseminating as it is unclear whether a tweet would be deemed a communication to shareholders or market professionals. Therefore, companies should presume that Reg FD applies to tweets.
In my discussions with IR professionals, Reg FD is one of the top reasons why public companies don’t use social networks for IR. So the authors are correct when they state that companies should surmise that tweets are governed by Reg FD.
Further, they go on to say, that on its own, Twitter does not distribute the information to the public in a broad, non-exclusionary way. Therefore Twitter should not be considered a primary method of disclosing and disseminating information, but rather should only supplement the more traditional forms of disclosure and dissemination. In our Twitter for IR report, we found that virtually all public companies are using Twitter as a channel to supplement traditional disclosure channels.
Best Practice Tip:
If a company is using Twitter in conjunction with some other method to disclose material information, the authors suggest they should provide advance notice with appropriate details, when for example, they are going to live-tweet their earnings call.
I would go on to add that if a company is using Twitter to supplement their other disclosure channels, they should say so. For example, saying something like “Follow us on Twitter and provide the link: http://twitter.com/q4websystems” which can be easily included in a standard boilerplate or FLS used for press releases and other company documents shared with the public. After all, why be on a social network if you aren’t going to disclose this to your key audiences?
Exchange Act Rule 10b-5
According to the definition provided in the article “This Act prohibits untrue statements of material fact and omissions of material facts that make what have been said misleading”. In other words, just like any other statements made by the company, Tweets would be bound by antifraud provisions. So, employees acting as company representatives are not exempt from any material misstatements or omissions by purporting to speak in their individual capacities.
The authors argue that “the casual and immediate nature of tweets and the appeal of being able to quickly disseminate information poses risk that a statement would create a Rule 10b-5 violation”. They also point out that Twitter’s 140-character limit could create additional risk due to a potential for misinterpreting a tweet based on its brevity.
There are a few ways that companies can mitigate the potential for shareholders misinterpreting a tweet:
- Preparing tweets in advance of the call. This is easily done by extracting key messages from the release and the script. Compiling the information for the tweets prior to the call will ensure consistent messaging and help mitigate the risk of tweeting anything that was not previously disclosed over an approved disclosure channel.
- Providing a link to the materials associated with the live event. For example, providing a link to the press release and presentation would provide followers with the complete information for the call.
Some additional ways that will also help mitigate liability:
- Company policy that outlines exactly what employees can and cannot tweet about.
- Disclaimers that are provided on Twitter profile and on website about use of Twitter.
- Links to your own website and blog. You could also reference a link that appears on a page on your website (which may appear in a list of other links) and provides the necessary disclaimers.
Archiving Information
The authors have some interesting observations regarding the information that is now housed on Twitter:
- The brevity that is required for a tweet limits a user’s ability to archive information or delete material that is out-of-date. As previously mentioned, providing the disclaimer at the beginning of the call will help mitigate liability. Hashtags are widely used by Twitter users to tweet conferences, quarterly calls and conduct on-line chats. Hashtags allow users to follow along live.
They also allow a user to search by the specific topic at a later date and read the thread. As far as dealing with information that is out-of-date the tweets are clearly time-stamped:
Also with respect to quarterly call tweets, companies like Weg S.A. make it easy to discern what quarter the tweet applies to:
- A post that is later viewed as problematic cannot be edited to include such disclaimers. As previously mentioned, preparing the tweets using hashtags that specifically denote the session will help avoid confusion as to whether the information is new or not.
- Chronological representation of tweets inhibits the ability to archive historical materials and statements to a separate section of the Twitter page to store the information. The authors specifically state “….historical statements…cannot be archived on a separate Twitter page to store the information”. In my opinion, this is splitting hairs a bit, as Wikipedia broadly defines Twitter as “a free social networking and micro-blogging service that enables its users to send and receive messages known as tweets”. Case in point, research we conducted on the use of Twitter for IR found that the majority of companies are primarily using Twitter for sharing links to materials that reside on their IR website already disclosed through Reg FD channels. So providing a disclaimer on your Twitter profile that directs people back to your IR website will alleviate any notion that Twitter is the primary place that you post material information. As for archiving historical statements I can say that hashtags would help a company archive statements pertaining to a specific event (as I have done this for webinars we have tweeted and was able to search for the specific event and compile the tweets).
- Hyperlinks to third-party websites exposes a company to liability if there is an inference that the company approved or endorsed the information. The authors then go on to cite that the “SEC does not feel a disclaimer alone is insufficient to insulate a company from antifraud liability and encouraged issuers to describe the purpose of the link, use an “exit notice” or “intermediate screen” so that a user knows that the third-party content is not company information and avoid links to only favourable information”.
If this was applicable to tweets, there are a few issues that could be raised to dispute the enforcement of this by the SEC:
- Technically tweet an article or sharing other third-party information you are not linking back to your website, so it would be difficult to say that a company was “endorsing” the information that is being tweeted. However, a company could preface the tweet by stating for example: interesting article from Wall Street Journal and then link to the article housed on the WSJ’s website.
- If users find interesting information they want to share, it can be retweeted. Retweeting complicates the liability as should the onus apply to the person who initially provided the link and the person who RT’d it? Tweets get retweeted all the time, so this would be an onerous policing undertaking for the SEC.
The authors have provided some good examples of potential compliance issues for public companies to consider for using Twitter as part of their corporate strategy. While some of the arguments are stronger than others, it is important that you read and be cognizant of these issues so you can take the necessary steps to prevent liability problems.
Related posts:
- Required reading for IROs – SEC’s Reg FD Compliance and Disclosure Interpretations
- Ten Essential Rules to Help IROs Use Twitter and Avoid the Ultimate Twinsult
- The Power of Information Distribution using Twitter
- Q4’s CEO Discusses all things Twitter, Social Media and Investor Relations
- How Rio Tinto Uses Twitter for Investor Relations
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