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"Tweeting" Running "Afowl" of SEC Rules?

With the rise of internet blogging and now Twitter, more and more individuals are finding an audience for their message, whatever that message may be. Even corporations have jumped on the bandwagon, with brick and mortar giants like Wal-Mart and General Motors joining the ranks of internet-based companies who have set up their own corporate blogs. But while open channels of communication between corporations and the public are arguably beneficial to the general public and perhaps investors, can there be too much of a good thing? Maybe. And that may spell trouble for corporations.

Since Congress enacted the Securities and Exchange Acts of 1933 and 1934, the US Government has sought to provide certain safeguards for investors in publicly traded securities through creation of a mandatory system of periodic disclosure. Boiled down, public companies like GM or Wal-Mart must disclose on a routine basis certain information like their financial status and other material developments that a reasonable investor should know - filings like annual statements which are monitored and reviewed by the Securities and Exchange Commission - the governmental entity tasked with enforcing compliance with US Securities Laws.

Thus, when companies engage in blogging or tweeting with the public, they necessarily expose themselves to a potential liability with the SEC knocking on their door if it determines they failed to make adequate disclosures or otherwise did not put in necessary safeguards to caution the public about the statements and viewpoints being expressed thereby misleading investors. And as well all know, the SEC carries a big stick.

As social networking mediums continue to expand and reach unprecedented levels of use in the months and years ahead, it will be interesting to see how the SEC responds, particularly with respect to enforcement issues concerning adequate disclosure. Indeed, it is not inconceivable to expect SEC rules defining "solicitation" and "offering" to be revisited and perhaps modified to take into account the nature and adequacy of communications in these new mediums. Accordingly, for now, public companies are probably best served by erring on the side of caution and proceeding slowing when exploring new channels of communications.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on April 27, 2009 (boomark / email).