On April 2, 2013, the Securities and Exchange Commission (the "SEC") issued a report of its investigation (the Report) of a potential Regulation FD violation by Netflix and its CEO, Reed Hastings, arising from his July 2012 Facebook posting about the company’s content streaming hours in the prior month. In the report, the SEC announced that it would not pursue an enforcement action and, acknowledging the "rapid proliferation of social media channels for corporate communications," provided guidance for the use of social media outlets for the wide dissemination of information required by Reg FD. A press release which accompanied the Report declared "Social Media OK for Company Announcements if Investors Are Alerted." A close look at the Report, however, reveals more caveats than reassurances for the use of social media by public companies. The press release may be found here and the Report may be obtained here.
In December of last year, news that Netflix had received a Wells Notice from the Division of Enforcement arising from the CEO’s personal Facebook page post drew widespread criticism. Hastings’ early July posting said that the company’s users had streamed 1 billion hours of content in the previous month, a new record for Netflix. His personal Facebook account apparently had more than 200,000 followers and so many believed that the post could easily constitute the "widespread dissemination" required under Reg FD. Others pointed out that the metric of streamed content hours could not possibly be "material" given the company’s revenue model and so Reg FD should not even have been implicated.
Regulation FD prohibits public companies from selectively disclosing material nonpublic information to shareholders and securities professionals, such as brokers and analysts, where it is reasonably foreseeable that they will trade on that information, before the information is made available to the general public. Typically, information is made available to the general public by a press release or a Form 8-K filing by the public company. In 2008, the SEC issued guidance on other methods of ensuring wide dissemination of information for Reg FD purposes. See Commission Guidance on the Use of Company Web Sites (Release No. 34-58288, Aug. 7, 2008) which can be accessed here. The 2008 Guidance was directed at the use of issuer web sites for disseminating information in compliance with Reg FD. In spite of the 2008 Guidance, few companies have made their websites a primary source for the dissemination of material company information. In fact, a recent NIRI survey revealed that less than 12% of public companies use or plan to use their company website as a dissemination vehicle for Reg FD purposes. With the explosion of the use of social media by companies for advertising and publicity purposes, guidance from the SEC with respect to the validity of using social media to comply with Reg FD seemed a necessary next step. The Division of Investment Management issued guidance recently to clarify when mutual funds must file with the SEC interactive content posted in real-time electronic forums such as chat rooms or other social media. (See IM Guidance Update No. 2013-01 (Mar. 2013).) The Report, at first blush, seems to be the SEC Reg FD guidance companies have been waiting for.
On the Relevance of the 2008 Guidance. Essentially, the SEC states that the 2008 Guidance for company use of web sites provides all of the guidance a company needs to use social media in compliance with Reg FD. The SEC states that it wants to “encourage companies to seek out new forms of communication to better connect with shareholders.” On the other hand, the Report warns, “We also remind issuers that the analysis of whether Regulation FD was violated is always a facts-and-circumstances analysis based on the specific context presented.”
Specifically, the SEC sets forth two key points in the Report. First, issuer communications through social media channels “require careful Regulation FD analysis comparable to communications through more traditional channels.” Second, the principles of the 2008 Guidance “apply with equal force to corporate disclosures made through social media channels.”
The SEC underscores the principle of the 2008 Guidance that the investing public must be alerted to the channels of distribution a company will use:
[W]e expect issuers to examine rigorously the factors indicating whether a particular channel is a “recognized channel of distribution” for communicating with their investors. (Citation to the 2008 Guidance.) We emphasize for issuers that the steps taken to alert the market about which forms of communications a company intends to use for the dissemination of material, non-public information, including the social media channels that may be used and the types of information that may be disclosed through these channels, are critical to the fair and efficient disclosure of information. [Emphasis added.]
But alerting the investing public to the channels is not the only factor set out in the 2008 Guidance. Those “non-exclusive” factors also include –
- consideration of the extent to which information provided through the website is regularly picked up by the market and readily available to the media and reported in the media;
- whether the website is kept current and accurate;
- whether the company uses other methods to disseminate information and whether those other methods are predominant methods used by the company; and
- the nature of the information.
Finally, the SEC expressed great skepticism that the personal social media site of an individual corporate officer would qualify under Reg FD as an acceptable method of dissemination. Presumably, however, with appropriate advance notice to investors that the personal social media site would in fact be one of the means of distribution of information by the company to the public, even the personal Facebook page of the officer could qualify under the 2008 Guidance, in spite of the fact that these sites might "not ordinarily be assumed" to be an official channel for a public company.
On Netflix and Hastings. The Report describes the facts giving rise to the SEC’s investigation of Netflix and Hastings, seems to suggest that the substance of the post could be deemed to be material nonpublic information and states clearly that the personal social media site of an officer, without clear advance notice to the public, would not qualify as a method reasonably designed to provide broad, non-exclusionary distribution of information to the public within the meaning of Regulation FD. Nevertheless, the Report states that the SEC has determined not to proceed with its enforcement action against Netflix and Hastings. The substance of its decision is not disclosed. Some have noted, however, the SEC’s acknowledgment in a footnote of the Report that later in July when Netflix announced its second quarter earnings (including quarterly subscriber numbers on the low end of prior guidance), the stock dropped from the previous day’s close of $80.39 to $60.28, perhaps suggesting that hours of streaming content was in fact not a material metric for the company.
Although on its face the Report emphasizes the SEC’s support of companies adopting new technologies to improve investor communications, it is not at all clear that this guidance will provide much comfort to public companies who would like to expand the use of their company Facebook pages, Twitter accounts and other social media in this area. Individual accounts of company officers used for company purposes will continue to be closely monitored, especially in light of the SEC’s admonition about these accounts in the Report. Given the rigor of the necessary analysis suggested here by the SEC in order to evaluate whether a social media channel could be a "recognized channel of communication," there will likely remain a lack of certainty which will cause most companies to continue to rely on press releases and Form 8-Ks to ensure compliance with Reg FD when announcing material nonpublic information.