On July 3, 2012, Reed Hastings, Chief Executive Officer of Netflix, Inc., used his personal Facebook page to distribute information regarding Netflix's online streaming viewership. Specifically, Mr. Hastings's Facebook post stated that streaming viewership had broken the one billion hours per month mark. In reaction to this post, the Securities and Exchange Commission initiated an investigation as to whether Netflix and Mr. Hastings had violated Regulation Fair Disclosure and Section 13(a) of the Securities Exchange Act of 1934.
"Regulation FD and Section 13(a) of the Exchange Act prohibit public companies, or persons acting on their behalf, from selectively disclosing material,1 nonpublic information to certain securities professionals, or shareholders where it is reasonably foreseeable that they will trade on that information, before it is made available to the general public."
Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, Release No. 69279 (April 2, 2013) (the "Report").
In 2008, the SEC issued guidance for complying with Regulation FD, which stated that public disclosure is accomplished when a company disseminates information "through a recognized channel of distribution." Commission Guidance on the Use of Company Web Sites, Release No. 34-58288 (Aug. 7, 2008) (the "2008 Guidance").
On April 2, 2013, the Commission released its Report and determined that it would not pursue an action against Netflix and Mr. Hastings, instead opting to take this opportunity to "provide guidance to issuers regarding how Regulation FD and the 2008 Guidance apply to disclosures made through social media channels." The Commission focused its inquiry on "whether the [disclosing] company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information."
In the Report, the Commission stated its position that "the analysis of whether Regulation FD was violated is always a facts-and-circumstances analysis based on the specific context presented." The Commission further indicated that "issuer communications through social media channels require careful Regulation FD analysis comparable to communications through more traditional channels" and that "the principles outlined in the 2008 Guidance — and specifically the concept that the investing public should be alerted to the channels of distribution a company will use to disseminate material information — apply with equal force to corporate disclosures made through social media channels."2
The Report, however, does not answer many questions. As pointed out by Jeff Zilka, Rich Myers, and Phil Gomes on Edelman.com (link here), questions remain regarding the best ways to notify investors that material information will be distributed on alternative social media channels; whether information distributed on one platform must be distributed on other media platforms simultaneously; transcript requirements for online video clips that contain material, non-public information; data retention issues; and the effect on Form 8-K filing requirements.
In summary, although "Most social media are perfectly suitable methods for communicating with investors," George Canellos, Acting Director of the Commission's Division of Enforcement, "Without adequate notice that such a site may be used for this purpose, investors would not have an opportunity to access this information or, in some cases, would not know of that opportunity, at the same time as other investors." For now, it seems the safest course of action to take is to continue to file Form 8-K's for public disclosures while considering social media alternatives.
Footnotes
1. For those who question why Mr. Hastings's statement about viewership is material information, Mr. Hastings has previously explained that streaming viewership hours are "a measure of an engagement and scale in terms of the adoption of our service and use of our service. . . ."
2. Regarding Mr. Hastings's specific actions, the Commission found that "Although every case must be evaluated on its own facts, disclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to qualify as a method 'reasonably designed to provide broad, non-exclusionary distribution of the information to the public' within the meaning of Regulation FD."
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