On July 3, 2012, Netflix Inc. CEO Reed Hastings posted a seemingly simple message to his personal Facebook page that read in part: “Netflix monthly viewing exceeded 1 billion hours for the first time ever in June.”
Neither Hastings nor his company had publicly shared these streaming numbers before. Perhaps for that reason, the Securities and Exchange Commission (SEC) didn’t find Hastings’ posting so innocuous, especially considering that Netflix’s stock quickly jumped from $70.45 at the time of the post to $81.72 by the end of the following trading day.
The agency launched an investigation to determine if Hastings had violated Regulation Fair Disclosure (FD) or Section 13(a) of the Securities Exchange Act, which prohibit public companies from selectively disclosing material, nonpublic information on which investors are likely to trade.
After its investigation, however, the SEC on April 2 issued a report absolving Netflix from any charges of wrongdoing. More significantly, the report also updated the agency’s previous disclosure guidelines to allow information dissemination on social media, provided that companies inform investors ahead of time that such sites will be channels for disclosure.
The SEC’s report provides some much-needed clarity for the corporate world and tech-savvy companies in particular. The agency had published guidance in 2008 that allowed disclosures on company websites and blogs, but it had not updated the standards to cover social networking sites.
“The previous guidance on Regulation FD needed updating to get in line with what’s happening on social media,” says Elaine Wolff, a Jenner & Block partner and former SEC attorney. “I think there was a big push for the SEC to make clear what channels a company could use to disclose material information.”
Passed in 2000, Regulation FD mandates that if a company releases material, nonpublic information on which securities professionals or shareholders are likely to trade, it must also broadly distribute that information to the public. It is designed to prevent the selective release of market-moving facts.
In Netflix’s case, the company had not informed investors to watch Hastings’ personal Facebook for corporate disclosures, nor had it shared the June 2012 streaming numbers through more traditional channels, such as a press release, a post on Netflix’s website or a Form 8-K, which is a formal investor notification.
But in a response filed with the SEC, Hastings maintained that his Facebook page was hardly private, given that it had more than 200,000 subscribers, including reporters. He also disputed that the streaming statistic was “material” to investors, arguing that the increase in Netflix’s stock on the day of the post was instead attributable to a Citigroup research report.
Although the SEC did not pursue an enforcement action against Hastings or Netflix, it did not give its unqualified endorsement to the use of executives’ personal social media accounts for information distribution, saying that, without advance notice, such use “is unlikely to qualify as a method ‘reasonably designed to provide broad, non-exclusionary distribution of the information to the public. This is true even if the individual in question has a large number of subscribers, friends, or other social media contacts.”
Instead, companies should either stick to making disclosures on official corporate accounts or notify investors well in advance that executives will be sharing such news on their personal profiles.
Social media’s real-time nature is one of its great advantages—and one of its biggest risks. When using new technologies for corporate disclosures, companies would do well to institute the same safeguards they use for more traditional distribution channels.
“[Companies] have processes in place now to vet what’s being said in a press release, and they ought to establish those same kinds of controls over who’s saying what on social media,” Wolff says.
Given that it’s not feasible for most companies to monitor countless social media pages—or for investors to subscribe to them—Wolff generally advises companies to limit their social media disclosure channels to two or three sites.
Doing so will also help companies avoid situations in which they let a social media page languish without updates until investors stop following it, only to post a significant piece of market-moving news weeks or months later. “If you say you’re going to use this outlet as a way to provide this information, you actually have to do it,” Arnold & Porter Partner and former SEC official Richard Baltz says.
Finally, companies can still run afoul of the measure if they fail to notify investors ahead of time that they are planning to release information on specific social media sites. “Without such notice the investing public would be forced to keep pace with a changing and expanding universe of potential disclosure channels, a virtually impossible task,” the agency said in its report.
The good news for companies confused about enforcement of the new SEC standards is that they can still ensure compliance by using more traditional disclosure channels in addition to social networking outlets. “Because [the issue] is still evolving, we’re advising our clients to continue to make 8-K filings when they put out material, nonpublic information through social media,” Dorsey & Whitney Partner Steven Khadavi says. “The cost and effort of doing so is minimal, and it’s a safeguard from any sort of inadvertent violation of regulation.”