The Wall Street Journal and other news outlets reported late yesterday that Netflix, Inc. filed a Form 8-K disclosing that each of Netflix and its CEO, Reed Hastings, had received a Wells notice from the staff of the Securities and Exchange Commission relating to an alleged violation of Regulation Fair Disclosure (FD) in connection with a Facebook post by Hastings on July 3, 2012. Hastings' Facebook post stated that "Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we'll blow these records away."
Regulation FD requires simultaneous "public disclosure" whenever an issuer, or any person acting on its behalf, discloses any material nonpublic information to a "prohibited person" (brokers, dealers, investment advisers and shareholders, among others) regarding the issuer or the issuer's securities. To satisfy the public disclosure requirement, issuers must file a Form 8-K or instead "disseminate[] the information through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public." In order to succeed in an enforcement action against Netflix and Hastings, the SEC will need to show that the Facebook post constituted material nonpublic information and was not reasonably designed to provide broad, non-exclusionary distribution of the information to the public.
First, reasonable minds can differ as to whether the statement regarding 1 billion hours is "material." Netflix and Hastings certainly disagree with the SEC staff; yesterday's Form 8-K filing by Netflix contained a copy of a Facebook post from Hastings flatly stating that "we think the fact of 1 billion hours of viewing in June was not 'material' to investors ...." Hastings' post yesterday also notes that the company had previously blogged that it was serving nearly 1 billion hours every month, implying that the information was already public and that the statement merely related to an otherwise immaterial crossing of a milestone.
Second, with respect to the public nature of the Facebook post, Hastings has over 200,000 Facebook subscribers, and a Google search of "Netflix 1 billion hours" reveals that within hours of the July 3 Facebook post, the Associated Press, PC Magazine, MSNBC, the Los Angeles Times, USA Today, the Huffington Post, the Atlantic magazine, and Forbes, among many others, had reported on the post. In addition, Yahoo! Finance, a widely followed financial web site that provides links to the latest news when a user searches for information regarding a particular stock, featured stories on July 3 from both the Associated Press and Forbes regarding the Facebook post on the same date. These facts would seem to allow Netflix and Hastings to easily claim (in the event the information is even determined to be material nonpublic information) that the Facebook post was reasonably designed to, and in fact did, provide broad, non-exclusionary distribution of the information to the public.
Perhaps the time is ripe to develop a new consensus regarding the proper role of social media in disclosure regarding public companies. In the meantime, in light of the SEC staff's apparent belief that a Facebook post does not satisfy Regulation FD's requirements, public companies would certainly be wise to avoid using Facebook, Twitter and other social media as a means of public dissemination of material information and continue to use other means, such as the issuance of press releases and/or the filing of Forms 8-K, to publicly disseminate such information. Also, if they have not done so already, public companies should consider adopting social media policies designed to assure that executives and other employees do not post information via social media that may be material.
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