General

The new social media tools, such as Facebook, blogs and Twitter are here to stay and are used more and more by companies for commercial purposes. The latest count is that 73 Fortune 100 companies maintain Twitter accounts. In addition, an increasing number of Israeli companies use Twitter to promote their business. This use raises unique issues from a US securities laws perspective, which will be reviewed in the article.

The Increased Use of Social Media Tools

Over the past few years we have witnessed a dramatic increase in the use of social media tools. Some of the tools are aimed primarily for business use (such as LinkedIn), but most of them are used mainly for social purposes (Facebook, MySpace, blogs and Twitter, for instance). In the past, certain companies prohibited the use of such tools for corporate purposes. However, in recent years a dramatic change has occurred and companies have taken advantage of these new means to reach to the public and today we can find corporate blogs, Facebook pages and Twitter accounts. This short article will focus on Twitter, briefly discussing what it is , how it is used by companies, and shed some light on the resulting legal exposure for such companies that are listed for trading in the US and how they can address it.

What is Twitter

In a nutshell, Twitter is a service that allows users to send and receive short text-based messages (known as “tweets”) from computers, PDAs and cell phones. A single tweet cannot exceed 140 characters in length, and each tweet is displayed on the user’s profile page and is delivered to other users who have selected to “follow” the user.

How Popular is the Use of Twitter by Companies

A recent study, from November 2009, claims that 73 out of the Fortune 100 companies use Twitter. To give a flavor of how popular it has become recently, it should be noted that as of August 2009 there were only 54 Fortune 100 companies with Twitter accounts.

Israeli companies are following this trend. In a sample of 13 Israeli companies that are listed for trading on NASDAQ, 6 of them maintain a Twitter account (namely, CheckPoint, ClickSoftware, Jacada, AudioCodes, Voltaire and Alvarion). It is clearly a trend that will expand, as 3 of these companies started Tweeting in or after July 2009.

What is Twitter Used for by Companies

Generally speaking, Twitter is being used by companies for three main purposes: marketing, advertising and investor relations. There are also more passive uses, such as monitoring what communications are made by others on the company’s products and services, which we will not deal with here.

companies use Twitter as a marketing, advertisement and public relations tool. Twitter is a cost free platform to post good news and accomplishments, notify of launching of new products and promoting company blogs as well as posting exclusive offers for Twitter users.

In addition, companies use Twitter as a free, real-time platform to spread information that is being disclosed on webcasts and conference calls. While this use is less common with Israeli companies, in the US it is an increasing trend to conduct tweeting sessions from shareholders meetings or earning conference calls.

What Unique Legal Challenges Does Twitter Entail When Used by a Public Company?

The use of Twitter is not different from the use of any other means of communication by a company. The same securities laws apply to the use of Twitter apply to the use of any other social media tools used by a company listed in the US. For instance, a company is required not to make any untrue statements of material fact and omissions of material facts that make what have been said misleading. However, unlike other social media tools, the limit of 140 characters in a tweet makes it really hard to make the required qualifiers and limitations to each statement. The fact that Twitter is by nature immediate, sends out information very quickly to the public, and that posts cannot be edited or erased, increases the exposure to the company.

Many tweets are composed of a few explanatory words and a hyperlink to third party websites. In such cases, the company is exposed to antifraud liability for the hyperlinked material because there may be an inference that the company approved or endorsed the information in such material. The policy released in 2008 by the Securities and Exchange Commission concerning use of websites by reporting companies (which does not focus on tweeting), provides, with respect to a hyperlink, that (i) a disclaimer alone is not sufficient to protect from liability; (ii) a description of the purpose of the link is required; (iii) the use of an ’exit notice’ or ’intermediate screen’ so that the user knows the third party content is not company info is required; and (iv) selective hyperlinks to favorable information should be avoided.

Obviously, applying this policy to tweeting is problematic, if not impossible. The company may want to consider posting additional tweet(s), that advise of the reason for such hyperlinks and stating that the company does not approve or endorse the content in such hyperlinks. In any event, the company should evaluate and minimize the risk to antifraud liability when permitting the use of hyperlinks in tweets. For example, links to the website of an exhibition where the company will be showing its products should generally be fine, but selectively posting links to articles with analysts’ favorable reviews of the company’s results and prospects entails more risk to the company.

Most of the Israeli companies mentioned above who are using Twitter do not use it to track online events, such as earning calls. However, with the anticipation that this use of Twitter will become more common, it should be noted that the best practice, is that before providing information, the company should post a few tweets (usually between 3-5) with the boilerplate disclaimer regarding use of non-GAAP measures. It should be further noted that any information sent out via Twitter needs to track, and not come before, the main forum where the discussion takes place, like a conference call. We note that the above also applies to forward looking statements.

Conclusions

Twitter, as well as all other new social media tools, is here to stay. The legal challenges that these new social media tools create exist and need to be addressed. Among the steps required to address them, one should first consider the company’s overall strategy of using Twitter and focus on the potential risks that this strategy entails. A further review of the company’s procedures, such as disclosure policy is highly recommended as well. Additionally, there should be ongoing monitoring of the posts by another person, such as the company’s general counsel, who is able to identify potential issues and risks.

Shy S. Baranov Esq., is a corporate partner at the firm and is based in Boston (ZAG/S&W). He specializes in assisting Israelis and Israeli firms conducting business in the United States