In connection with a Facebook post by Netflix CEO Reed Hastings, the SEC issued a report of investigation on April 2, 2013 (Netflix Report) indicating that Regulation FD permits a company to announce material information through social media channels like Facebook and Twitter if the company has alerted investors regarding which social media channels it may use to disseminate such information. The Netflix Report indicates, however, that assessing whether it is permissible for a particular company to use a specific social media channel for disclosure of material information requires "a careful Regulation FD analysis" of the facts and circumstances. Moreover, the Netflix Report does not address some questions that the use of social media as a disclosure channel raises. For these reasons, many companies may decide that it is best to not rely on (or at least limit the use of) social media for the disclosure of material information until the SEC guidance and best practices in this area become more settled. In addition, the Netflix Report highlights the risk that a company's officer's use of social media channels to discuss the company can result in violations of Regulation FD.
The SEC adopted Regulation FD in 2000 to address the selective disclosure of information by publicly traded companies. Regulation FD provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain persons enumerated in Regulation FD, it must distribute that information to the public. The persons enumerated in Regulation FD include, in general, (1) securities market professionals and (2) holders of the issuer's securities, under circumstances in which it is reasonably foreseeable that the person will purchase or sell the issuer's securities based on the information. Regulation FD defines "person acting on behalf of an issuer" to include any senior officer of the issuer or any other officer, employee, or agent of the issuer who regularly communicates with securities market professionals or with security holders. Under Regulation FD, the timing of the required public disclosure depends on whether the selective disclosure was intentional or nonintentional. For an intentional selective disclosure, the issuer must make public disclosure simultaneously; for a nonintentional disclosure, the issuer must make public disclosure promptly. A disclosure is intentional if the disclosing party either knows or is reckless in not knowing that the information is both material and nonpublic. Under Regulation FD, a company may make the required public disclosure by filing or furnishing information in a Form 8-K or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
The SEC issued guidance in 2008 clarifying that web sites can serve as an effective means for disseminating information to investors if a company has made investors aware that the web site is a place to look for the information. The 2008 Guidance lists factors to be considered, including not only whether and how the company alerted investors and the markets that they should look to the site for information, but also the following:
- The extent to which information posted on the web site is regularly picked up by the market and readily available media, and reported in such media, or the extent to which the company has advised newswires or the media about such information and the size and market following of the company involved
- The steps the company has taken to make its web site and the information accessible, including the use of "push" technology, such as RSS feeds, or releases through other distribution
- Whether the company keeps its web site current and accurate
- Whether the company uses other methods in addition to its web site posting to disseminate the information and whether, and to what extent, those other methods are the predominant methods the company uses to disseminate information
The Netflix Report confirms that Regulation FD applies to a company's dissemination of information by social media and other emerging means of communication the same way it applies to disclosure on a company web site.
The Netflix Report arose from an inquiry that the SEC's Division of Enforcement initiated into a 43-word message that Netflix CEO Reed Hastings posted in July 2012 on his personal Facebook page. The page had more than 200,000 followers, including bloggers and reporters. In the post, Hastings stated that Netflix's monthly online viewing had exceeded 1 billion hours for the first time. Netflix did not report this information to investors through a press release or Form 8-K filing, and a subsequent company press release later that day did not include this information. Neither Hastings nor Netflix had previously used his Facebook page to announce company metrics, and they had never before taken steps to alert investors that Hastings' personal Facebook page might be used as a medium for communicating information about Netflix.
1. Companies Should Alert Investors Before Distributing Information Through Social Media
As noted above, the Netflix Report indicates that Regulation FD may permit a company to announce material information through a social media channel (or channels) like Facebook or Twitter if the company has alerted investors that it expects to use the particular channel to disseminate such information. The Netflix Report does not address how a company should accomplish such an alert. We recommend that if a company intends to announce material information through social media, it disclose in its periodic reports, press releases, or, if the company has already appropriately identified its corporate web site as a place on which it will disclose material information, on its corporate web site the specific social media channels the company intends to use for the dissemination of material nonpublic information.
Even if the company has specified in advance the social media channels it will use for such dissemination, there are still risks associated with using those channels. The Netflix Report provides no specific insight into how the factors set forth in the 2008 Guidance should be applied in the context of a social media channel. In addition, if a company is disclosing through numerous corporate and executive social media channels and accounts in addition to other media, it may be unreasonable — both practically and legally — to expect investors and other persons to have access to and monitor all such disclosure outlets. Therefore, many companies may decide that it is best to not rely on (or at least limit the use of) social media for disclosure of material information until the SEC guidance and best practices in this area become more settled. Moreover, although a report of investigation is an official statement by the Commission, it is not an interpretative release and might provide less protection than an interpretative release.
2. Companies Should Consider Being Conservative in Evaluating Whether Information Selectively Disclosed Is Material
The Netflix Report indicates the difficulty companies often face in assessing whether the SEC will consider information to be material and nonpublic. The Netflix Report indicates that the SEC relied primarily on three factors as indicating that the information Hastings posted to his Facebook page was material. Although Netflix disclosed in an early June 2012 posting on Netflix's official blog that people were "enjoying nearly a billion hours per month of movies and TV shows from Netflix," the Netflix Report characterizes that disclosure as a "brief reference" in a blog that was "technical in nature." The price of Netflix stock increased more than 15 percent from the time of Hastings' Facebook post to the close of trading the following day. After the market closed, several articles in the mainstream press picked up the story and several research analysts wrote about the 1 billion viewing hours as a positive measure of customer engagement.
There are several reasons why Netflix might reasonably have believed that the information Hastings posted to his Facebook page was not material and nonpublic. Netflix might not have appreciated that the SEC would view information as nonpublic even though Netflix had disclosed very similar information on its official blog. Netflix derives its revenues through fixed subscriber fees that are not based on the number of hours of programming viewed. Netflix might have attributed the subsequent increase in the price of Netflix stock not to the post, but to a positive Citigroup research report issued the prior evening, especially since the price of Netflix stock had been rising before Hastings' posting.
The Netflix Report observed that even though Netflix sent Hastings' post to several reporters approximately an hour after the post, Netflix did not file the post with the SEC or furnish it to the SEC on a Current Report on Form 8-K, issue a press release through its standard distribution channels, or otherwise announce the streaming milestone. This observation arguably implies that the SEC believed that by not disseminating Hastings' post broadly in a manner that clearly conformed to Regulation FD, Netflix violated the requirement that if a company inadvertently discloses information selectively, the company must make public disclosure promptly by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public. Thus, the Netflix Report serves as a reminder that, in close calls, a company should give serious consideration to treating information as material even if the company believes the information is immaterial.
3. Companies Should Consider Implementing Procedures With Respect to the Use of Social Media by Individuals Within the Definition of Persons Acting on Behalf of an Issuer
Applying to a personal social media channel the factors set forth in the SEC's 2008 Guidance can be problematic even if the company has alerted the investing public to look for information on that social media channel. Accordingly, companies should seriously consider prohibiting senior officers and officers, employees, and agents who regularly communicate with securities market professionals or with securities holders from discussing company information on their personal social media accounts.
The Netflix Report reflects the risks that can result from a company's covered persons posting on a personal social media outlet information regarding the company. Six months after Hastings' posting, the SEC issued Wells Notices to Netflix and to Hastings indicating the SEC staff's intent to recommend that the Commission authorize an enforcement action for violations of Regulation FD and providing an opportunity to each recipient to explain why such an action would be inappropriate. Another four months elapsed before the matter was resolved without an enforcement action. In addition to the cost involved in responding to the SEC investigation and the adverse publicity generated by the investigation, the investigation was likely a significant distraction at a time when Netflix was transitioning its business model.
Moreover, the SEC typically uses a report of investigation where the SEC recognizes that there was substantial uncertainty regarding the application of the federal securities law to the alleged facts and wants to alert the companies and securities lawyers to the SEC's view. Once a report of investigation has set forth the SEC's position that a particular fact pattern violates the federal securities laws, the SEC is much more likely to authorize an enforcement action if a similar fact pattern arises. Accordingly, there is a substantial possibility that the SEC would authorize an enforcement action if a situation similar to Hastings' post were to recur.
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