SECURITIES LAW DISCLOSURES & SOCIAL MEDIA
Skilled Houston Securities Attorney
In December 2012, there was quite a stir when the Enforcement Division
of the Securities and Exchange Commission (“SEC”) announced
that it intended to recommend an enforcement proceeding against Netflix,
Inc. and Reed Hastings, Netflix’s CEO due to postings by Mr. Hastings
on his Facebook page. The SEC’s case focused on whether Mr. Hastings’
postings constituted sufficient disclosure under the federal securities laws.
This article describes the background of the Netflix case, the legal issues
at play, the ultimate result, and a few thoughts on the issued raised.
In June 2012, Netflix posted on its corporate blog that Netflix members
were getting close to streaming 1 billion hours of its streaming movie
and TV service in a month, a first for the company.
On July 3, 2012, Mr. Hastings posted on his personal Facebook page the
following message: “Netflix monthly viewing exceeded 1 billion hours
for the first time ever in June.” Mr. Hastings had over 200,000
followers on his Web page.
The company’s stock moved up over 6% that day and continued rising
over the course of the next few days. By July 9, the overall rise in the
stock price was over 22% from the pre-Facebook post stock price.
On December 5, 2012, Netflix filed a report with the SEC stating that the
SEC’s Division of Enforcement had sent a “Wells notice”
to Netflix and to Mr. Hastings alleging that Mr. Hastings’ Facebook
post violated Regulation FD and Section 13(a) of the Securities Exchange
Act of 1934, which requires public companies to make certain disclosures
with the SEC.
In this same Form 8-K filing, Mr. Hastings also included as an exhibit
a Facebook posting that he intended to post the next day rebutting the
DISCLOSURE REQUIREMENTS OF PUBLIC COMPANIES
Netflix’s common stock is listed on the NASDAQ Stock Market, which
is a national securities exchange. As a result, Section 13(a) of the Securities
Exchange Act requires the company to disclose certain material events.
In 2000, the SEC promulgated Regulation FD, which governs disclosure by
issuers. Regulation FD is designed to prevent selective disclosure by
issuers and their management of important corporate events, such as earnings
updates. The SEC passed Regulation FD due to widespread dissatisfaction
with the fact that Wall Street analysts and large investors had access
to company executives on conference calls and therefore could trade on
that information before other investors received that same information.
Regulation FD is designed to prevent this selective disclosure by requiring
issuers to disclose material nonpublic information that is revealed intentionally
to everyone at the same time, or if the information is accidentally disclosed,
to make a public disclosure promptly thereafter.
METHODS OF DISCLOSURE
Regulation FD officially sanctions the use of a current report (Form 8-K)
to make disclosures of material nonpublic information to investors, but
this method is non-exclusive; as a result, issuers and management are
free to use other methods of ensuing that their disclosures are widely
disseminated in accordance with Regulation FD. However, issuers usually
file a Form 8-K announcing material events or issue a press release that
is disseminated via a national newswire service in order to ensure compliance
with Regulation FD.
In 2008, the SEC issued a release providing guidance on the use of corporate
Web sites to make disclosures. The SEC noted that using Web sites for
such purposes is acceptable, provided that shareholders know that the
issuer posts material information there on a regular basis.
Because the 2008 release was issued before social media Web site grew in
popularity, many (including, apparently, Mr. Hastings) were uncertain
on the application of this guidance to social media, such as Facebook.
OUTCOME OF THE NETFLIX CASE
In determining not to pursue enforcement action against Netflix and Hastings,
the SEC issued what is called a Section 21(a) Report of Investigation
outlining the SEC’s views on the use of social media to make Regulation
FD disclosures. Under Section 21(a) of the Securities Exchange Act, the
SEC can issue official reports regarding its positions on certain securities
In the Netflix Section 21(a) report, the SEC stated that an issuer must
(1) disseminate material information non-selectively and broadly, (2)
use a recognized channel of distribution for such disclosures, and (3)
inform the investing public when it uses or intends to use a non-traditional
method of disclosure.
The SEC found that Mr. Hastings’ use of his
personal Facebook page did not constitute a recognized channel of distribution
since Netflix never advised shareholders (through a Form 8-K, press release,
or other notice) that the company could provide updates there. However,
the SEC decided not to bring an enforcement action against Netflix or
Mr. Hastings due to the perceived uncertainty regarding Regulation FD.
There has not been any further SEC rulemaking or enforcement action regarding
the use of social media in making required securities law disclosures
since the Netflix investigation and subsequent Section 21(a) report. As
a result, we do not have any definitive guidance from the SEC as to what
other social media outlets will meet the Regulation FD criteria, although
Web sites similar to Facebook should be adequate, i.e. Google+, LinkedIn, etc.
SUGGESTIONS FOR USING SOCIAL MEDIA FOR REQUIRED DISCLOSURES
From the Netflix case, we can divine the following:
- Company communications should be made on company Web sites and resources,
not personal sites.
- If the company intends on making disclosures through social media, it should
first inform the investing public of the site it plans to use for these
- Whatever medium is used for disclosures should have broad distribution.
Whitley LLP Attorneys at Law right away for legal counsel if you need help with a securities matter.