On April 2, 2013, the Securities and Exchange Commission issued a report of investigation addressing its recent, and much publicized, pursuit of Netflix's CEO for his use of Facebook to announce a material corporate development, a Netflix monthly viewing milestone (the "Netflix Report"). In the report, the SEC indicated that it would not bring an action against Netflix or its CEO because Regulation FD permits public companies to use social media, in certain circumstances, to announce important company information.
Reg. FD provides a company must promptly file a Form 8-K with the SEC when it makes selective disclosure to analysts, investors or shareholders of important non-public information, such as earnings, acquisitions, new product developments, etc. Alternatively, companies may use other recognized channels of disclosing the information provided the alternative channels result in broad, non-exclusionary distribution of that information to the public. In short, the goal of Reg. FD is to ensure that there is "public disclosure" of the non-public information so as to level the playing field for investors and the rest of the market.
Prior to the release of the Netflix Report, there was some question as to how the SEC would treat the dissemination of important company information through social media because the SEC's only prior guidance consisted primarily of a 2008 release addressing only the use of company websites to disseminate information. In the case of Netflix, CEO Reed Hastings posted the milestone information on his personal Facebook page, which had more than 200,000 subscribers. Prior to this posting, neither Mr. Hastings nor Netflix had ever released material non-public information through the Facebook account. Netflix and Mr. Hastings took the position that a Facebook post to over 200,000 people was a public announcement, particularly where some of the 200,000 Facebook fans were reporters and bloggers. At least initially, the SEC took the position that the posting was selective disclosure of inside information to the CEO's Facebook fans and therefore was not a widely disseminated "public" statement. In response to the Facebook posting, Netflix's stock rose over 6%.
In the Netflix Report, the SEC indicated that its 2008 guidance on compliance with Reg. FD was intended to be flexible and adaptive to various forms of electronic communications, and therefore applied to social media. Accordingly, the SEC indicated it would permit companies to use social media to communicate with investors in compliance with Reg. FD provided the company informs the market that it will be distributing material information through that channel of communication and the channel results in broad, non-exclusionary distribution of that information to the public. On April 10, 2013, and in response to the Netflix Report, Netflix filed another 8-K informing investors that it announces material information to investors through various social media channels, including the Netflix blog and Netflix Facebook page, the personal Facebook page of Mr. Hastings and the Netflix Twitter account.
Take-away: Companies seeking to use social media in the future to disseminate important non-public information should: (1) inform the market that they will be using social media to disseminate the information (this can be done in SEC filings, press releases and on corporate websites), (2) specify the types of information that will be disseminated via the social media (for example, financial information, management developments, company product or service milestones, etc.), (3) be consistent with the use of social media (i.e., investors need to know they can rely upon the designated channel of distribution), and (4) continue with press releases and traditional methods of disclosure until the company is confident the market is aware that it is using social media and has accepted it as an alternative method of distribution.
Reprinted with permission from the Association of Corporate Counsel – SC Chapter