Social media sites have proved to be invaluable platforms on which public companies may communicate with their customers and investors, but those added benefits have come with some potential pitfalls for company management. On December 5, 2012, Netflix and its CEO Reed Hastings received a Wells Notice from the Securities and Exchange Commission. This type of notice is meant to inform a party that the SEC intends to bring an enforcement action against it and provides the party with an opportunity to explain why the enforcement action is inappropriate.

The comments prompting this Wells Notice were made by Hastings on July 3, 2012. Posting to his personal Facebook page, Hastings stated that "Netflix monthly viewing exceeded 1 billion hours for the first time ever in June." The SEC believes this comment violated Regulation FD, a rule adopted to address the selective disclosure of information by public companies. The SEC summarizes Regulation FD as follows: when an issuer discloses material nonpublic information to certain individuals or entities—generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis of the information—the issuer must make public disclosure of that information.

The SEC's concerns with Hastings' statement were twofold. First, because Netflix's business is based largely on selling access to video streaming, statistics relating to viewership are closely-tied to sales figures. The SEC believes this type of information is material because a reasonable investor would consider it important in making an investment decision. In fact, on the day of Hastings' post, Netflix shares rose 6.2%.

Next, Hastings made the comment via Facebook, but did not make a concurrent disclosure in a press release or Form 8-K filed with the SEC, the methods normally used to disclose such information. Though Facebook and other social media sites may one day become recognized channels through which a company may disclose its financial information, the SEC does not believe that they currently hold such a distinction. When he made the comment, Hastings had over 200,000 followers on his Facebook page, but the SEC is not just concerned about the number of people that information reaches; it is also concerned with the method of dissemination and whether the investment community is on notice of a company's disclosure practices. The question then becomes whether a CEO's personal Facebook page has made the list of sources that the investment community is expected to monitor. The SEC seems to think it has not, at least in the case of Netflix.

It remains unclear how the Netflix case will be resolved. The SEC decided to use its enforcement power to dictate policy in this instance, rather than simply issuing an interpretive release aimed specifically at the use of social media. While the SEC may ultimately choose to bring an action against Netflix, it is unlikely that such an action would provide clarity for other public companies in their use of social media. If anything, an enforcement action may produce more questions than answers. For that reason, commentators have expressed both frustration with the SEC's actions to this point and skepticism regarding the Commission's ability to adapt to technological developments.

The SEC has not expressly addressed the use of social media sites in the context of Regulation FD, but it has provided guidance on the use of company websites in such situations. In August 2008, the SEC issued an interpretive release (Exchange Act Release No. 34-58288) detailing how companies can use their web sites to provide information to investors in compliance with the federal securities laws. A company wishing to use its website to satisfy the "public disclosure" element of Regulation FD must evaluate whether and when:

  • a company web site is a recognized channel of distribution;
  • posting of information on a company web site disseminates the information in a manner making it available to the securities marketplace in general; and
  • there has been a reasonable waiting period for investors and the market to react to the posted information.

It will be interesting to see whether the SEC provides official guidance on whether a company may establish a social media site as a source of its financial information in a similar fashion to how a company would do the same with its website. Tom Kim, Chief Counsel of the SEC's Division of Corporation Finance, spoke to this issue during a panel discussion for TheCorporateCounsel.net in May of 2011. Kim's personal view, rather than that of the SEC as a whole, was that the SEC's 2008 guidance pertaining to company websites may also be applied to communications made via social media sites. If the SEC adopts this view, it is possible that companies like Netflix, which has a strong following on social media sites, would eventually be able to satisfy the three prongs outlined in the SEC's 2008 release.

Until the SEC provides a definitive answer, companies would be wise to closely monitor communications they make via social media sites. The informal nature of these sites often creates a false sense of security, but Netflix's situation has shown that even casual comments can lead to SEC sanctions. As always, the most certain way to disclose information in compliance with Regulation FD is to first issue a press release or file the information via the SEC's EDGAR website. In fact, it seems that Hastings may have already learned this lesson and may be moving toward establishing Facebook as a recognized channel for the distribution of Netflix's financial information. On December 6, 2012, Hastings responded to the SEC's claims, once again using his Facebook page. But this time, prior to posting the statement on Facebook, Netflix filed a Form 8-K with the SEC, noting that "a copy of a statement that will be made by Mr. Hastings to subscribers on his publicly available Facebook page is attached as Exhibit 99.1."

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