In July this year, Reed Hastings, the CEO of Netflix Inc (Netflix), posted on Facebook that Netflix’s members had enjoyed over 1 billion hours in June. Mr Hastings has well over 200,000 followers, including various reporters and bloggers, and there was some press coverage of the post. Netflix did not otherwise issue a formal press release or make a regulatory filing. Netflix’s stock rose the day of the post, although the price is said to have begun to rise before the post, possibly as a result of a positive research report issued the evening before by Citigroup.
It appears that SEC staff have now issued a Wells Notice, informing Netflix that they are recommending that the SEC bring a civil action in respect of the July post. The SEC’s position is apparently that the information in the post about the June Netflix viewing figure was “material” information which should have been released “publicly” through a regulatory filing or press release.
SEC staff are alleging a breach of Regulation FD, which provides that when an issuer selectively discloses material nonpublic information to certain individuals or entities, the issuer must make public disclosure of that information. For the purposes of Regulation FD, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods “reasonably designed to effect broad, non-exclusionary distribution of the information to the public”.
In 2008, the SEC issued some guidance which acknowledged that the evolution of technology and the growth of use of the Internet meant that, for some companies in certain circumstances, posting of the information on the company’s Web site, in and of itself, could be a sufficient method of public disclosure under Regulation FD, provided that postings on their Web sites were ‘‘reasonably designed to provide broad, non-exclusionary distribution of the information to the public”. A posting on a Facebook account is, of course, qualitatively different from a posting on a company website, and may not alone constitute “non-exclusionary” distribution.
Mr Hastings argues that:
- the use of blogging and social media, including Facebook, allows the company to communicate much more quickly and directly with the public and its members than a regulatory filing (8-K filings can be accessed through the SEC website or through a service which aggregates and redistributes such filings) or a press release (accessible on the company’s website or through news media outlets);
- a posting on Facebook to over 200,000 people is very public, particularly when many of these are reporters and bloggers;
- the fact of 1 billion hours of viewing in June was not “material” to investors (indeed a few weeks before, the company had blogged that it was serving nearly 1 billion hours per month); and
- the price increase began before the post and was due to the positive Citigroup report.
When the SEC revised its guidance in 2008, it acknowledged that the Internet had changed significantly since 2000 (the year of the last issue of extensive guidance on the use of Web sites and electronic media).
It may now be time for securities regulators worldwide – and particularly for the European Securities and Markets Authority (ESMA) in the context of the revisions to the European Market Abuse regime – to revisit existing guidance and regulations in the light of technological developments, and the translation of those technologies into investor tools, and to consider whether (and what forms of) social media might become recognised channels of distribution, whether alone or in combination with other distribution channels.