#SocialStocks: EC launches investigation into potential TikTok DSA breach

Welcome to “#SocialStocks,” The Fly’s weekly recap of Wall Street’s reactions to social media stock news.

LOOPHOLE: Meta Platforms (META) released instructions on a workaround that allows advertisers to avoid paying a 30% service charge to Apple (AAPL), Salvador Rodriquez of The Wall Street Journal wrote. The workaround is specifically for “boosted posts,” which, later this month, Meta will begin charging U.S. advertisers who purchase boosted posts from apps on iPhones and iPads a 30% service fee that will be paid to Apple. “We are required to either comply with Apple’s guidelines, or remove boosted posts from our apps,” Meta said in a blog post on Thursday.

FACT-CHECK FUNDING: Meta is reducing payments to news outlets that fact-check potential WhatsApp misinformation, such as around elections, and has cut CrowdTangle funding, The Information’s Kalley Huang and Sylvia Varnham O’Regan reported, citing three people with knowledge of the situation.

ONE STEP CLOSER: Digital World Acquisition Corp. (DWAC) and Trump Media & Technology Group, or TMTG, announced that on February 14, the U.S. Securities and Exchange Commission declared effective the Registration Statement on Form S-4 for the companies’ proposed business combination. Digital World expects to announce within two business days, the date of the special meeting of its stockholders, where stockholders of the record date, yet to be announced, can vote on the approval and adoption of the Business Combination. “Digital World and TMTG look forward to continue collaborating toward the consummation of their long-awaited partnership,” the companies stated. “We are immensely proud of the strides we’ve taken towards advancing the Business Combination. This achievement marks a significant milestone for us. Our sincere thanks go to our shareholders for their unwavering support. We are excited to soon share the news of the Business Combination’s approval process with them,” added Eric Swider, the CEO of Digital World.

WELCOME ABOARD: Meta announced that Hock Tan and John Arnold have been elected to the company’s board of directors, effective immediately. Hock Tan has served as Broadcom’s (AVGO) president and CEO and a member of the board of directors since March 2006. John Arnold is co-founder and co-chair of Arnold Ventures.

DSA INVESTIGATION INTO TIKTOK: The European Commission, or EC, has opened formal proceedings to assess whether TikTok may have breached the Digital Services Act (DSA) in areas linked to the protection of minors, advertising transparency, data access for researchers, as well as the risk management of addictive design and harmful content. On the basis of the preliminary investigation conducted so far, including on the basis of an analysis of the risk assessment report sent by TikTok in September 2023, as well as TikTok’s replies to the Commission’s formal Requests for Information, the Commission has decided to open formal proceedings against TikTok under the Digital Services Act. The compliance with the DSA obligations related to the assessment and mitigation of systemic risks, in terms of actual or foreseeable negative effects stemming from the design of TikTok’s system, including algorithmic systems, that may stimulate behavioral addictions and/ or create so-called ‘rabbit hole effects’. Such assessment is required to counter potential risks for the exercise of the fundamental right to the person’s physical and mental well-being, the respect of the rights of the child as well as its impact on radicalization processes. Furthermore, the mitigation measures in place in this respect, notably age verification tools used by TikTok to prevent access by minors to inappropriate content, may not be reasonable, proportionate and effective; The compliance with DSA obligations to put in place appropriate and proportionate measures to ensure a high level of privacy, safety and security for minors, particularly with regard to default privacy settings for minors as part of the design and functioning of their recommender systems; The compliance with DSA obligations to provide a searchable and reliable repository for advertisements presented on TikTok; The measures taken by TikTok to increase the transparency of its platform. The investigation concerns suspected shortcomings in giving researchers access to TikTok’s publicly accessible data as mandated by Article 40 of the DSA. If proven, these failures would constitute infringements of Articles 34(1), 34(2), 35(1) 28(1), 39(1), and 40(12) of the DSA. The Commission will now carry out an in-depth investigation as a matter of priority. The opening of formal proceedings does not prejudge its outcome. The current opening of proceedings is without prejudice to any other proceeding that the Commission may decide to initiate on any other conduct that may constitute an infringement under the DSA, for example in relation to a provider’s obligations concerning the dissemination of illegal content, such as terrorist content or child sexual abuse online, or the notification of suspicions of criminal offences. It is also without prejudice to enforcement actions undertaken by other authorities under other regulatory frameworks, for example, by the Consumer Protection Cooperation Network. After the formal opening of proceedings, the Commission will continue to gather evidence, for example by sending additional requests for information, conducting interviews or inspections. The opening of formal proceedings empowers the Commission to take further enforcement steps, such as interim measures, and non-compliance decisions. The Commission is also empowered to accept any commitment made by TikTok to remedy on the matters subject to the proceeding.

EARNINGS RECAP: Shares of Sprout Social (SPT) dipped more than 10% following the company’s fourth quarter earnings release. Sprout’s results and guidance were either ahead of, or in line with, analyst consensus. “We’re pleased to share incredibly strong fourth quarter results,” said Justyn Howard, Sprout Social’s CEO and co-founder. “We’re building an enduring software company centered on amazing products, amazing people and overdelivering for our customers every day. We delivered step change growth in current & total contract value bookings and were recently named the #1 best software product by G2, which we believe position Sprout to build on our momentum in 2024.” Piper Sandler bumped up the firm’s price target on Sprout Social to $66 from $62 and maintained an Overweight rating on the shares. At face value, Sprout Social reported Q4 numbers and FY24 guidance were in line to slightly above consensus estimates, the firm said. However, results fit within a broader ongoing investor debate on Sprout Social’s organic growth prospects, Piper contended. From the firm’s vantage point, its organic numbers are going down, but very modestly. The 11% decline in the stock after hours felt overdone to Piper. On the other hand, Barclays lowered the firm’s price target on Sprout Social to $72 from $75 and reiterated an Overweight rating on the shares. Sprout posted a “respectable” Q4 that was weighed by conservatism and the last of its upmarket transition optics, the analyst told investors in a research note. The firm noted that while the initial after-hours response was negative, it expects the print to be viewed in a brighter light as investors dig in more. “Our execution and leading indicators in Q4 were strong,” said Joe Del Preto, CFO. “We’ve largely moved away from our low end growth anchor. We believe the step change in quality of our Q4 outperformance and notable momentum with leading social-first brands position Sprout to continue to execute well on our journey towards $1B in annual revenue.”