This blog examines the SEC’s recent Investigative Report on Netflix’s potential violation of Regulation FD by posting material, non-public information using Social Media, in this case on the CEO’s personal Facebook page.
But it raises the broader question: Can a posting on Facebook ever satisfy the requirements of Regulation FD? We conclude that in almost every case it cannot. We recommend that in every case in which previously non-disclosed information is posted on a social media site, whether it be Facebook, LinkedIn or Twitter, that the posting be made part of a press release simultaneously issued by the company and simultaneously filed as Regulation FD information on Form 8-K.
We also caution all of our clients to be careful about how they present the information. Our advice is always: Consider what the SEC would say if you put the information in your press release [or social media posting] in an S-1 registration statement reviewed by the staff. If the staff wouldn’t like what you say or how you say it in an S-1, you shouldn’t be saying it in a press release either. We urge all of our clients to have all press releases and postings reviewed by us for input on this matter. For more information, please Contact Us.
First, what is Regulation FD and what does it require: Regulation FD and Section 13(a) ofthe Exchange Act prohibit public companies, or persons acting on their behalf, from selectively disclosing material, 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. The Commission’s 2008 Guidance explained that for purposes of complying with Regulation FD, a company makes public disclosure when it distributes information “through a recognized channel of distribution.”
What are the facts in the Netflix case: On July 3, 2012, just before 11:00 a.m. Eastern time, CEO Hastings posted the following message on his personal Facebook page: Congrats to Ted Sarados, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away. Keep going, Ted, we need even more! This announcement represented a nearly 50% increase in streaming hours from Netflix’s January 25, 2012 announcement that it had streamed 2 billion hours over the preceding three-month quarter. Prior to his post, Hastings did not receive input from Netflix’s chief financial officer, the legal department, or investor relations department. Netflix did not file with or furnish to the Commission a Current Report on Form 8-K, issue a press release through its standard distribution channels, or otherwise announce the streaming milestone. Neither Hastings nor Netflix had previously used Hastings’s Facebook page to announce company metrics. Nor had they taken any steps to make the investing public aware that Hastings’s personal Facebook page might be used as a medium for communicating information about Netflix.
What is the SEC looking for in assessing Regulation FD compliance: The central focus of this inquiry is whether the 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.
The SEC continued: We take this opportunity to clarify and amplify two points. First, issuer communications through social media channels require careful Regulation FD analysis comparable to communications through more traditional channels. Second, 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. If the issuer were to elect not to file a Form 8-K, the issuer would need to consider whether the information was being disseminated in a manner “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.”
What was the SEC’s conclusion: 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.
In our next blog posting we’ll examine the 2008 release in greater detail to help you understand how Regulation FD relates to all sorts of internet based disclosures, not just social media.
To see the SEC’s release and report, follow this link: