The SEC and Social Media
by Douglas W. Clayton
On April 2, 2013, the Securities and Exchange Commission (SEC) issued a report with respect to its investigation into whether or not Netflix, Inc. and its Chief Executive Officer, Reed Hastings, violated SEC regulations by virtue of Mr. Hastings’ disclosure of information about Netflix via his personal Facebook account. The SEC chose not to pursue enforcement action against Netflix or Mr. Hastings, but the report is a reminder to all publicly traded companies and their representatives who use social media that any use of social media must comply with SEC disclosure rules. The SEC report also explains that publicly traded companies may disclose company information via social media so long as the investing public has been given notice that the company plans to use social media to disclose information and provides instructions on how to access such social media.
Regulation FD and Selective Disclosure
Netflix and Mr. Hastings were alleged to have been in violation of the SEC’s Regulation FD (Fair Disclosure). Regulation FD was adopted in 2000 in response to concerns that some publicly traded companies were making material, non-public information available to favored analysts and stock market participants before making such information available to the investing public. The SEC perceived that such selective disclosure was unfair to investors that did not receive the information and could cause an erosion of investor confidence in the securities markets.
Regulation FD requires that whenever a publicly traded company or a person acting on its behalf discloses material, non-public information to securities market professionals or to stockholders of the company, the company must also publicly disclose such information. If the disclosure to the securities market professional or stockholder is intentional, the public disclosure must occur simultaneously with the private disclosure. If the selective disclosure is unintentional, Regulation FD requires the company to promptly thereafter make public disclosure of such information.
Public Disclosure and 2008 SEC Release
A company can comply with Regulation FD’s public disclosure requirements by furnishing or filing the information on a Form 8-K with the SEC or by using any other method to disseminate the information that is “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” The SEC cited press releases distributed through a widely circulated news or wire service as one such acceptable alternative distribution method. Another method of distribution specifically endorsed by the SEC in its release adopting Regulation FD was a 3-step process consisting of (1) a press release containing the information; (2) a press release or website posting announcing a conference call to discuss the information along with instructions on how to access the call; and (3) holding the conference call itself.
In 2008, the SEC issued an interpretive release further clarifying that a publicly traded company may use its website to disclose information in compliance with Regulation FD if the website would be regarded as a “recognized channel of distribution.” Unfortunately, the SEC’s 2008 release did not specifically prescribe what was required for a website to meet that standard, although it did identify several factors which would be considered in making the determination, including whether or not the company had notified investors and the markets that it planned to post important information on its website.
On July 3, 2012, Mr. Hastings posted a message on his personal Facebook page noting that in June 2012 Netflix’s customers had exceed one billion hours of monthly viewing through Netflix’s online streaming service for the first time. In an earlier earnings conference call, Netflix had identified the number of streaming hours viewed as an important metric in measuring the company’s success in engaging its customers. Mr. Hastings had over 200,000 Facebook “friends” at the time of the post, including securities market participants and Netflix stockholders. Netflix’s stock price opened at $70.45 on July 3, and climbed to $81.72 by the close of the next trading day.
Because Mr. Hastings’s Facebook post included material, non-public information about Netflix, his disclosure implicated Regulation FD. Because the Facebook post was delivered to securities market participants and stockholders, among others, the post violated Regulation FD unless Mr. Hastings’s Facebook page could be considered a “recognized channel of distribution.” The SEC release noted that Facebook, Twitter or any social media channel or the company’s website could serve as such a recognized channel of distribution of company information for the purposes of Regulation FD if the company takes steps to alert the investing public that it intends to distribute material, non-public information through such channel.
Doug Clayton is a partner with Cantey Hanger LLP. He can be reached at firstname.lastname@example.org.