A Lesson Before Tweeting: Corporate Disclosures in the Age of Twitter

September 1, 2018

We have all read the tweet:

Elon Musk Tweet

Elon Musk’s August 7th tweet set off a firestorm: widespread questions and criticisms, speculation about the well-being of Tesla and Musk himself, shareholder lawsuits, and an SEC investigation. While a great deal has been written about the truthfulness of Mr. Musk’s tweet (see, for example, a Bloomberg article quoting our own Joe Tabacco), this article takes a different approach. This article focuses on the rules of and risks to companies communicating market-moving information via social media and what it means for investors.

First, some background. If public markets espouse a level playing field, then, in theory, no investors should receive special treatment. For years, there was criticism of cronyism and selective disclosures of non-public information: CEOs leaking an early tip to larger shareholders or currying favor with some analysts by providing an early scoop. In 2000, the SEC took steps to end such abuses by enacting Regulation FD, which prohibits public companies, or persons acting on their behalf, from selectively disclosing material, non-public information to certain securities professionals or shareholders before making the information available to the general public.

Regulation FD was not intended to impose a “one size fits all” standard for disclosure, and the SEC has been open to changes in how corporations and individuals communicate. Back in 2013, the SEC permitted the use of social media as a platform for releasing company information. There, the SEC was analyzing a Facebook post by Netflix CEO Reed Hastings, who had revealed that Netflix had “exceeded 1 billion hours for the first time.” As we wrote at the time, the SEC clarified that publicly-traded companies can use social media outlets to announce material developments, so long as they advise investors beforehand where to look for such news so that no shareholder can ‘get a jump’ on others. As the then-acting director of the SEC’s Division of Enforcement commented, “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.”

This so-called Reed Hastings Rule has been widely followed by companies, in no doubt spurred by studies that over two-thirds of American adults get at least some of their news on social media. For example, Facebook tells users to follow the company’s website “as well as Mark Zuckerberg’s Facebook Page . . . as means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD.” Walmart directs investors to the company’s website, Facebook page, and Twitter feed. And back in 2013, Tesla informed investors “interested in keeping up with Tesla” that they should follow the company’s website, press releases, blog, and the Twitter accounts for the company and Mr. Musk.

But just because you can tweet does not mean you should tweet. Each year the list of company social media flubs, and subsequent apologies, grows. But often such stumbles are tied to more general promotion of company products or events. The real question – as recently asked by Andrew Ross Sorkin – is: “Is Twitter the right forum for public company executives to disseminate market-moving information in the first place?” Jeffrey S. Sonnenfeld, a Senior Associate Dean at Yale School of Management told the New York Times, “All tweets are misleading with such a short character limit. Companies shouldn’t be encouraging the use of Twitter for its executives. They should forbid it.”

One easy lesson from the fallout from Musk’s tweets is that investors do not want cryptic announcements. If a company tweets, they should contemporaneously publish a more robust announcement elsewhere, whether in a press conference, a press release, or an SEC filing. And, of course, when a company elects to speak, it must speak truthfully, or otherwise risk liability for issuing false and misleading statements. Time will tell if companies use social media to announce major corporate news. To be safe, investors should make sure they “Linkedin”, “friend”, and “follow” the companies they invest in. (And don’t forget to follow us too. Twitter, LinkedIn).