SEC “Likes” Social Media Disclosure, So Long as Investors are Alerted

April 24, 2013

On July 3, 2012, Netflix CEO Reed Hastings kicked off the holiday weekend with some fireworks of his own by posting on his personal Facebook page that Netflix had streamed a billion hours of content in the month of June.  Hastings designated the post as “public,” making it available to anyone on the Internet, including Facebook’s billion users and Hastings’ own 200,000 Facebook “friends”.  What followed were thousands of “likes”, comments and “shares”, extensive media coverage and a spike in Netflix’s stock price.  And oh yes, an SEC investigation.  Both Netflix and Hastings received a “Wells Notice” from the SEC’s Enforcement Staff indicating its intent to recommend that the SEC bring enforcement proceedings for violations of Regulation FD.

On April 2, 2013, the SEC issued its Report on the investigation, stating that it would indeed not seek enforcement proceedings in this case, and declaring more broadly that companies may use social media such as Facebook and Twitter to disseminate material, non-public information under Reg FD provided that investors are properly alerted in advance that the company intends to use those particular channels of distribution to disseminate material information.

Reg FD requires that when an issuer, or a person acting on its behalf, discloses material, non-public information to securities market professionals or shareholders where it is reasonably foreseeable that they will trade on the basis of the information, it must distribute that information in a manner reasonably designed to achieve broad and non-exclusionary distribution to the public.  Reg FD was intended to level the playing field, and was adopted out of concern that issuers were selectively disclosing important non-public information, such as advance warning of earnings results, to securities analysts or selected institutional investors before making full disclosure of the information to the general public.

The SEC had previously provided guidance in 2008 on the disclosure of material non-public information on company websites and other “push” technology forms of communication such as email alerts and RSS feeds, along with “interactive” communication tools such as blogs.  In the 2008 guidance, the SEC stated that a company makes Reg FD-compliant public disclosure when it distributes information “through a recognized channel of distribution.”  It spoke of the vital role of the Internet and electronic communications in modernizing the disclosure system and promoting transparency, liquidity and efficiency in trading markets.  The guidance offered a non-exhaustive list of factors to be considered in evaluating whether a corporate web site constitutes a recognized channel of distribution.  The central focus of the inquiry is whether the company has made investors, the market and the media aware of the channels of distribution it expects to use, so that these parties know where to look for disclosures of material information about the company.

The SEC’s April 2 Report extends the 2008 guidance on corporate website disclosure to social media.  Specifically, the Report states that (i) issuer communications made through social media channels require careful Reg FD analysis comparable to communications made through more traditional channels; and (ii) the principles outlined in the 2008 guidance, particularly that markets should be alerted to the channels of distribution a company will use to disseminate material information, apply to disclosures made through social media channels as well.  The rationale is that identifying the specific social media channels a company intends to use for material non-public information disclosure will give investors the opportunity to take the steps necessary to be in a position to receive important disclosures, such as subscribing, joining, registering, and reviewing the designated channels.

Under these standards, it would seem that Hastings and Netflix were grossly non-compliant.  Hastings’ personal Facebook page had not been previously used to announce company metrics, and Netflix had not previously informed shareholders that Hastings’ Facebook page would be used to disclose information about Netflix.  The post was not accompanied by a press release, a post on the corporate web site or Facebook page or a Form 8-K.  Nevertheless, the SEC chose not to bring enforcement proceedings, apparently because the proliferation of the use of social media to communicate with shareholders had created uncertainty over how Reg FD and the 2008 guidance would apply to social media disclosures, and the SEC felt obligated to provide some guidance.

For its part, Netflix isn’t taking any chances.  Within a few days after the SEC’s Report, Netflix filed an 8-K designating the social media channels where investors, the media and others should review information about Netflix, including two Netflix blogs, Netflix’s Facebook page and Twitter Feed and Reed Hastings’ public Facebook page.

Interestingly, Hastings’ post should not have even been a Reg FD issue because the streaming metric arguably should not even be relevant to Netflix’s revenues, much less material to Netflix, inasmuch as its revenues are derived through fixed subscriber fees that are not based on the number of hours of programming viewed.  Ironically, Hastings himself may have helped decide the issue of materiality to Netflix’s detriment while on an earnings call in January 2012 when, in answer to a question on relevance, he stated that the metric was a measure of engagement and scale in terms of use of service and that Netflix would update that metric on a milestone basis.