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The Evolving Nature of Identifying and Disclosing the Business Risks of Using Third-Party Social Media Marketing

In Casper Sleep’s initial public offering prospectus, the company states that the use of third-party paid marketing programs to promote its products presents the possibility of negatively affecting its reputation and subjecting it to fines and other penalties.

In the third of a string of recent IPO companies that are heavy users of social media influencers and product reviewers, mattress maker Casper Sleep, Inc. has highlighted the potential business risks of this paid-for brand marketing approach.

Casper Sleep’s initial public offering prospectus, like those of Revolve Group, Inc. (June 2019) and Sprout Social, Inc. (December 2019) before it, describes the importance of the company’s presence on social media platforms. It maintains Instagram, Snapchat, Facebook, Twitter and Pinterest accounts, its own channel on YouTube and Spotify, and relationships with thousands of social media influencers. Given the importance of these marketing tools to its customer origination efforts and ultimately the sale of its products, it is not surprising to see social media prominently featured in the “Risk Factors” section of Casper Sleep’s prospectus. Companies are required under Item 105 of the Securities and Exchange Commission (SEC)’s Regulation S-K disclosure framework to discuss in their IPO prospectuses “the most significant factors that make an investment in the registrant or offering speculative or risky.”

Casper Sleep’s first business risk about social networking cautions investors that third-party social media influencers – like celebrities appearing in popular print advertisements and TV commercials – could engage in behavior or use their platforms to communicate to the company’s customers in a manner that reflects poorly on the company’s brand and reputation.  Despite a company’s best efforts to manage these relationships, the risk factor concedes it is not possible to always prevent such behavior.

Casper Sleep’s second business risk factor cautions investors that, if third-party media influencers acting at the company’s direction make or post problematic product or marketing claims in violation of applicable regulations or guidelines, the company itself could be subject to regulatory investigations, class action lawsuits, fines or penalties. In particular, it is noted that the Federal Trade Commission has sought enforcement action where an endorsement has failed to conspicuously disclose the terms of the relationship between an influencer and the company. Here too, the risk factor concedes that the company cannot regularly monitor the content of what influencers post, which is a requirement imposed on the company by the FTC. Regulators or others could seek to hold the company responsible for the content of influencers’ posts.

Takeaway: Risk factors in SEC filings are supposed to be unique to each company. For public companies, or those companies preparing to undertake the IPO process, that rely upon their presence in new and emerging popular social media platforms to promote their products, risk factors that identify potential reputational harm and regulatory burden should be considered.

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