On April 2, 2013, the Securities and Exchange Commission (SEC) issued a Report of Investigation1 and accompanying press release2 clarifying that a company may use social media such as Twitter and Facebook to comply with its Regulation FD requirements to disclose material information, so long as the company has taken reasonable steps to alert investors and the market as to which social media will be used to disseminate such information. The report was prompted by a Facebook post made by Netflix CEO Reed Hastings on his personal Facebook page announcing that Netflix had streamed one billion hours in a single month for the first time, information that was not disclosed through a press release or in a Form 8-K filing. The SEC decided that in lieu of pursuing an enforcement action, it would issue a Report of Investigation under Section 21(a) clarifying Regulation FD’s applicability to company announcements made via social media and other emerging channels of communication.
- Any information released via social media is subject to Regulation FD.
- The SEC’s 2008 Guidance on the Use of Company Web Sites3 applies equally to social media.
- Social media may be used to announce material information so long as investors are notified of the company’s intention to disclose information using social media channels, the channels to be used and the types of information that will be disclosed via those channels.
- Though the SEC elected not to pursue an enforcement action against Netflix or Hastings, the report indicates Netflix and Hastings were not in compliance with the 2008 Guidance and had thus violated Regulation FD.
Regulation FD and Section 13(a)
Regulation FD and Section 13(a) of the Securities Exchange Act of 1934 prohibit public companies, or persons acting on their behalf, from selectively disclosing material, nonpublic information to certain securities industry professionals or to securities holders, where it is reasonably foreseeable that they will trade on that information, before the information is disseminated to the general public. For the purposes of complying with Regulation FD, a company makes public disclosure when it distributes information “through a recognized channel of distribution.” The prohibition does not take into account intent or any motive (or lack of motive) to favor one information recipient over another.
Hastings’ Post on Facebook
Netflix had several times stated that it intended to expand its Internet-streaming business, including in a press release issued on January 4, 2012, and in a letter to shareholders from Hastings dated January 25, 2012, which was issued as a press release and filed with the SEC on a Form 8-K. Both the press release and the letter touted the fact that Netflix had streamed two billion hours of content in the fourth quarter of 2011. When asked on the 2011 fourth quarter earnings call why this streaming metric was relevant, Hastings emphasized the materiality of the metric by answering that it showed the “widespread adoption and usage of the service,” and that he anticipated that going forward the company would update the metric on a “milestone basis.”
On July 3, 2012, Hasting posted on his personal Facebook page, which at the time had over 200,000 subscribers:
“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!”
The SEC noted in its report that prior to the post, Hastings did not consult with Netflix’s chief financial officer, its legal department or its investor relations department. Furthermore, Netflix did not file or furnish a Form 8-K or issue a press release disclosing the metric or use any other means to alert investors and others that Hastings’ Facebook page would be used to disclose information about Netflix. Neither Hastings nor Netflix had previously used Hastings’ personal Facebook page to announce company metrics or disclose other material nonpublic information. However, certain persons covered by Regulation FD subscribed to Hastings’ Facebook page, including investors and equity analysts of registered broker-dealers. After the Facebook post, Netflix’s stock price increased from $70.45 to $81.72, or 16 percent, at the close of the following trading day.
The SEC declined to pursue an enforcement action against Netflix and Hastings, electing instead to issue a Section 21(a) Report of Investigation to clarify the application of Regulation FD and its August 2008 Guidance on the Use of Company Web Sites (2008 Guidance) to disclosures made via social media.
The SEC’s 2008 Guidance on the Use of Company Web Sites
The SEC issued its 2008 Guidance to give companies guidance on whether a company’s website may be a “recognized channel of distribution” for the purposes of Regulation FD. The 2008 Guidance stated that such a determination will depend upon the steps the company has taken to alert investors, the market and the media to its intention to use its website as such a channel of distribution, so that parties are aware of where to look for disclosures of material information, as well as what they may need to do to be in a position to receive such information. Companies were encouraged to include in their periodic reports and press releases the corporate website address and a note, if appropriate, that they will routinely post relevant information on the website.
The SEC states that the 2008 Guidance is equally applicable to current and evolving social media channels of corporate communication. Just as they must when using their websites to disclose key information, companies must take steps sufficient to alert investors and the market to the channels it will use for the dissemination of material, nonpublic information.
The report specifically states that, “[d]isclosure 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.” This is the case “even if the individual has a large number of subscribers, friends, or other social media contacts.”
The SEC pointed out that in the Regulation FD Final Rule Release, from 2000, it had “caution[ed] issuers that a deviation from their usual practices for making public disclosure may affect our judgment as to whether the method they have chosen in a particular case is reasonable,” so providing sufficient notice to investors is paramount. Notably, the SEC stated in the report that disclosures on corporate websites of the specific social media channels the company intends to use to distribute material information would give investors and the markets an opportunity to take the steps necessary to be in a position to receive the information—whether by subscribing, joining, registering or “liking” that particular social media channel.
What is a Section 21(a) report?
Occasionally, the SEC may resolve an investigation with a Section 21(a) report rather than an enforcement action. These reports are used to alert the public as to how the SEC views particular matters that may have been unclear. They essentially put industry on notice that the SEC will consider any future similar conduct as deserving of an enforcement action. Since 1996, the SEC has issued only 11 Section 21(a) reports.
If the SEC elected not to charge Netflix or Hastings with a Regulation FD violation, why should any other company have to alert investors and the media as to its intentions to utilize social media?
The Report of Investigation is not a “no-action” letter and does not represent license to engage in similar missteps. Although the SEC concluded that there was genuine uncertainty as to the applicability of Regulation FD and the 2008 Guidance to disclosures made through social media channels, companies have now been warned that Regulation FD and the 2008 Guidance apply to such disclosures.
How does this report change the 2008 Guidance?
It doesn’t. The SEC used this opportunity to extend the application of the 2008 Guidance to also apply to social media. Social media is now clearly within the domain of Regulation FD. On the other hand, this also means social media is now an acknowledged means to disseminate material, nonpublic information.
Does this change any Form 8-K filing requirements?
No. The SEC has repeatedly confirmed that disclosure of information on a Form 8-K is a permissible method of disseminating information for Regulation FD purposes, but nothing in the Report of Investigation or the 2008 Guidance modify in any respect any required Form 8-K reporting obligations. So, for example, if an issuer uses social media to disclose “material non-public information about [its] results of operations or financial condition for a completed quarterly or annual fiscal period,” the issuer must still comply with its reporting obligations under Item 2.02 of Form 8-K.