New York, NY – Earlier this week, the SEC cleared Netflix CEO, Reed Hastings, of violating Reg FD when he posted a market moving piece of corporate news on his Facebook page. The agency ruled that using social media sites could be an appropriate means of distributing important corporate information in certain circumstances.
Background of the Case
The ruling resulted from an SEC investigation into a Facebook post made by Netflix CEO, Reed Hastings on July 3rd, 2012. Hastings posted the following message on his personal Facebook page:
“Congrats to Ted Sarados, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away. Keep going, Ted, we need even more!”
This post caused the firm’s shares to move higher as it represented a nearly 50% increase in streaming hours from Netflix’s January 25, 2012 announcement. The SEC’s investigation was to determine if that post had violated Regulation Fair Disclosure which bars companies from selectively disclosing information.
The SEC initially felt that Hastings and Netflix had violated Reg FD because the firm had not previously used Facebook to announce important corporate information, nor had they informed the public that this page could be a source of this type of information.
Mr. Hastings contended that he didn’t need to make additional disclosures to the public since he had more than 200,000 subscribers to his personal Facebook page, making the post “very public”. In addition, Netflix had previously disclosed news about achieving this threshold on its company blog.
As a result of its investigation, the SEC decided not to bring an enforcement action against either Mr. Hastings or Netflix because of the uncertainty about how traditional corporate disclosure requirements pertain to social media.
The SEC released a report of its investigation (http://www.sec.gov/litigation/investreport/34-69279.pdf) saying that public companies can use various social media sites like Facebook, Twitter or LinkedIn to announce important information as long as investors have been told where to look.
George Canellos, acting director of the SEC’s enforcement division, said in a statement, “Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don’t know that’s where they need to turn to get the latest news.”
Consequences of the Case
So, what does this means for corporate issuers? In short, public companies will be able to decide whether it makes sense for them to distribute important corporate information using social media, with two important caveats. The first is the firm will need to determine is the social media platform is appropriate. In addition, the company will need to inform their investors where to look for this information. The SEC’s report on their investigation addresses these issues.
“Specifically, in light of the direct and immediate communication from issuers to investors that is now possible through social media channels, such as Facebook and Twitter, we expect issuers to examine rigorously the factors indicating whether a particular channel is a “recognized channel of distribution” for communicating with their investors. We emphasize for issuers that the steps taken to alert the market about which forms of communication a company intends to use for the dissemination of material, non-public information, including the social media channels that may be used and the types of information that may be disclosed through these channels, are critical to the fair and efficient disclosure of information. 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.”
Ultimately, companies will now have the means to communicate key company information and developments to their investors in an even more “real-time” way than relying on government filings, press releases, or management calls.
Oh, and the SEC? While this ruling suggests that they are intent on trying to adapt to the new communications tools of the 21st century, it still took the regulators close to 20 minutes to tweet a press release about this new ruling.