On April 2, 2013, the Division of Enforcement of the U.S. Securities and Exchange Commission released guidance on the use of social media to disseminate material, nonpublic information under Regulation FD (Fair Disclosure). Released as a Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 regarding Netflix, Inc. and Reed Hastings, the Division concluded that, while it was not seeking to inhibit corporate communication through the use of social media channels, dissemination through such channels must be analyzed for compliance with Regulation FD and investors should be informed of which channels the company intends to utilize for such disclosures.
Regulation FD generally provides that when an issuer, or a person acting on its behalf, discloses material, nonpublic information to a group that includes certain enumerated persons, including analysts or investors, it must be made in a manner reasonably designed to provide broad, non-exclusionary distribution of the information to the public. If selective disclosure to enumerated persons is made intentionally, it must be broadcast to the public simultaneously. If selective disclosure is made unintentionally, it should be publicly broadcast promptly thereafter.
The facts behind the investigation are fairly straightforward. On July 3, 2012, Reed Hastings, CEO of Netflix, Inc., posted a statement on his personal Facebook page that Netflix’s June viewing exceeded 1 billion hours for the first time. Netflix did not issue a press release through its standard distribution channels, file a Form 8-K, or otherwise disseminate this information. This 1 billion hours represented a nearly 50% increase in streaming hours from a January 25, 2012 announcement made by Netflix in its fourth quarter financial earnings release. While Mr. Hastings’ Facebook page is accessible by the public, the company had neither before used his page to make announcements nor notified investors that his page might be used for such communications. The Division also noted that “[p]rior to his post, Hastings did not receive input from Netflix’s chief financial officer, the legal department, or investor relations department.” The online streaming and video rental company reported on a Form 8-K that Mr. Hastings received a “Wells Notice” from the SEC on December 5, 2012.
The Division decided not to pursue an enforcement action in this matter. It emphasized that all disclosures to groups that include an enumerated person should undergo a “facts-and-circumstances” analysis to determine compliance with Regulation FD. The Division also encouraged reporting companies to refer to its 2008 Guidance on the Use of Company Web Sites, which encourages issuers to consider including in periodic reports and press releases the web sites that a company utilizes to post important information and disclosing on such websites any other generally used avenues of corporation communication. In particular, the Division noted that (1) an issuer communication through social media channels requires careful Regulation FD analysis and (2) the public should be alerted to the sources that the issuer expects to use to distribute such information so that the public knows where to look for disclosures and can do whatever is required to be in a position to receive the information.
The Board and Director Utilization of Social Media Task Force of the American Bar Association met on April 4, 2013, to discuss the recent SEC guidance and the evolving landscape of the release of information. The task force intends to present this topic at the ABA’s Annual Meeting in San Francisco later this year.