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Did Netflix’s Facebook Posting Disclose Too Much — to Too Few?
People these days use Facebook to tell their “friends” about all kinds of things – a favorite TV show, a political bent, a new relationship and all kinds of other details about their lives. But recent enforcement action by the U.S. Securities and Exchange Commission should make clear to corporate officers and boards that Facebook may not be the best place to talk about company operations.
Netflix and its Chief Executive Officer, Reed Hastings, both received so-called “Wells” Notices from the SEC last week arising from Facebook postings that Hastings made in June about the company’s success. An SEC Wells notice notifies a company or individual that the agency intends to recommend enforcement action and invites the company or individual to submit an explanation to the SEC why it should not proceed.
In July, Hastings wrote on his Facebook page that Netflix users streamed more than 1 billion hours of video in June. The SEC is questioning whether that disclosure – access to which would be limited to those who are “friended” with Hastings on Facebook — violated fair disclosure regulations known as “Reg FD”. Reg FD states that, 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 purpose of these restrictions is to prevent issuer companies from disclosing material information preferentially to certain traders or securities market professionals.
Over the years, the SEC has periodically issued guidance about how Reg FD should be applied to developing technologies – first in the context of websites and then in the context of blogs. It does not appear, however, that the agency has previously issued formal guidance for the use of other forms of social media such as Facebook. The general requirements for the use of such technologies in compliance with Reg FD is that the information must be published through a “recognized channel” of distribution, and it must be disseminated in a manner designed to reach the public in general.
In public statements, Netflix and Hastings note the large number of people with access to the Facebook post (which they set at 200,000) included a number of reporters and bloggers, and argue that the size and composition of this audience make the Facebook posts fully compliant. They noted that many people re-posted the post (making it available to an even broader audience) and that there was press coverage thereafter as well. They have also asserted that the fact disclosed was not “material” to investors, noting that there had been a previous statement on Netflix’s blog as few weeks earlier that they were serving nearly 1 billion hours per month. While the value of Netflix stock did rise on the day of the Facebook post, Netflix and Hastings note that the increase started well before that mid-morning post, and assert that it was likely due to a positive Citigroup research report issued the previous evening.
It very well may be that the SEC accepts the explanation proffered by Netflix and Hastings and decides not to proceed with its civil enforcement action. Nevertheless, the story is a good object lesson for corporate personnel regarding the care that must be taken with statements in social media, and perhaps a sign of how government regulators are beginning to scrutinize social media as a new forum in which they may find violations of the regulations under their purview. To the extent that the SEC anticipates policing Facebook or other social media as part of its regulatory oversight of information disclosure, the agency should, in fairness, make clear to issuers the parameters of acceptable statements in those fora.