In December 2012, there was quite a stir when the Securities and Exchange Commission (SEC) announced that it intended to recommend an enforcement proceeding against Netflix, Inc. and Reed Hastings (Netflix’s CEO) due to postings by Mr. Hastings on his Facebook page. The SEC’s case focused on whether Mr. Hastings’ postings constituted sufficient disclosure under the federal securities laws.
This article provides some background of the Netflix case, the legal issues at play, the ultimate result, and a few thoughts on the issues it raised.
In June 2012, Netflix posted on its corporate blog that Netflix users were getting close to streaming 1 billion hours of movie and TV services in a month – a first for the company.
On July 3, 2012, Mr. Hastings posted on his personal Facebook page the following message: “Netflix monthly viewing exceeded 1 billion hours for the first time ever in June.” Mr. Hastings had over 200,000 followers on Facebook.
That same day, the company’s stock moved up over 6%, and continued rising over the next few days. By July 9, the overall rise in stock price was over 22% from the pre-Facebook post stock price.
On December 5, 2012, Netflix filed a report with the SEC stating that the SEC’s Division of Enforcement had sent a “Wells notice” to Netflix and to Mr. Hastings, alleging that Mr. Hastings’ Facebook post violated Regulation FD and Section 13(a) of the Securities Exchange Act of 1934, which requires public companies to make certain disclosures with the SEC.
In this same Form 8-K filing, Mr. Hastings also included as an exhibit a Facebook posting that he intended to post the next day rebutting the SEC’s allegations.
Disclosure Requirements of Public Companies
Netflix’s common stock is listed on the NASDAQ Stock Market, which is a national securities exchange. As a result, Section 13(a) of the Securities Exchange Act requires the company to disclose certain material events.
In 2000, the SEC promulgated Regulation FD, which governs disclosure by issuers. Regulation FD is designed to prevent selective disclosure of important corporate events, such as earnings updates, by issuers and their management. The SEC passed Regulation FD due to widespread dissatisfaction with the fact that Wall Street analysts and large investors had access to company executives on conference calls and could therefore trade on that information before other investors received it.
Regulation FD is designed to prevent selective disclosure by requiring issuers to disclose material nonpublic information to everyone at the same time, or if the information is accidentally disclosed, to make a public disclosure promptly thereafter.
Methods of Disclosure
Regulation FD officially sanctions the use of a current report (Form 8-K) to make disclosures of material nonpublic information to investors, but this method is non-exclusive. As a result, issuers and management are free to use other methods of ensuring that their disclosures are widely disseminated in accordance with Regulation FD. Issuers usually file a Form 8-K, or issue a press release that is disseminated via a national newswire service.
In 2008, the SEC issued a release providing guidance on the use of corporate websites to make disclosures. The SEC noted that using websites for such purposes is acceptable, provided that shareholders know that the issuer posts material information there on a regular basis.
Because the 2008 release was issued before social media sites grew in popularity, many (including, apparently, Mr. Hastings) were uncertain on the application of this guidance to social media, such as Facebook.
Outcome of the Netflix Case
Although the SEC decided not to pursue enforcement action against Netflix and Hastings, it did issue what is called a Section 21(a) Report of Investigation, outlining the SEC’s views on the use of social media to make Regulation FD disclosures.
In the Netflix Section 21(a) report, the SEC stated that an issuer must (1) disseminate material information non-selectively and broadly, (2) use a recognized channel of distribution for such disclosures, and (3) inform the investing public when it uses or intends to use a non-traditional method of disclosure.
The SEC found that Mr. Hastings’ use of his personal Facebook page did not constitute a recognized channel of distribution since Netflix never advised shareholders (through a Form 8-K, press release, or other notice) that the company could provide updates there. However, the SEC decided not to bring an enforcement action against Netflix or Mr. Hastings due to the perceived uncertainty regarding Regulation FD.
Since the Netflix investigation and subsequent Section 21(a) report, there has not been any further SEC rulemaking or enforcement action regarding the use of social media in making required securities law disclosures. As a result, we do not have any definitive guidance from the SEC as to what other social media outlets will meet the Regulation FD criteria, although websites similar to Facebook should be adequate (i.e. Google+, LinkedIn, etc).
Suggestions for using Social Media for Required Disclosures
From the Netflix case, we can conclude the following:
- Company communications should be made on company websites and resources, not personal sites.
- If the company intends on making disclosures through social media, it should first inform the investing public of the site it plans to use for these disclosures.
- Whatever medium is used for disclosures should have broad distribution.