The news is out! There’s a buzz in the blogosphere. It’s trending on Twitter. The Securities and Exchange Commission has authorized the use of social media channels for the disclosure of material, non-public information. In a Report of Investigation released earlier this month, announcing that its Division of Enforcement determined not to pursue an enforcement action against Netflix, Inc. and its Chief Executive Officer Reed Hastings, the SEC provided guidance regarding how issuers using social media channels to disseminate material non-public information may comply with Regulation FD and the Commission’s August 2008 Guidance on the Use of Company Web Sites. The investigation that the SEC called-off was predicated on whether Netflix and Hastings violated Regulation FD when Hastings used his personal Facebook page to announce that Netflix had streamed one billion hours of content in June 2012.
When Netflix disclosed in December 2012, that the company and Hastings had received “Wells Notices” from the SEC, commentators called the SEC crackdown on the use of social media “misguided” and suggested that the SEC join the digital age. These calls did not go unheeded by the SEC, which asserts in the Report that it “encourage[s] companies to seek out new forms of communication to better connect with shareholders.” The Report offers guidance concerning how issuers can establish a social media channel as a “recognized channel of distribution” including identifying on corporate websites and through press releases the social media channels that a company intends to use for the dissemination of material non-public information. On April 10, 2013, Netflix issued such a press release listing nine possible channels by which it announces material financial information, including its investor relations website, SEC filings, press releases, public conference calls and webcasts, its various blogs, its Facebook page, its Twitter feed, and its CEO’s public Facebook page.
The Report offers no guidance as to how the actual medium used affects the Fair Disclosure analysis. Twitter, for example, limits tweets to just 140 characters and the limit is further decreased if the tweet includes a URL. The SEC does not address this limitation and how it – and the limitations of other social media channels – may affect the accuracy of issuers’ tweets.
The use of social media outlets by issuers to disseminate material information also requires investors to distinguish pure advertisement from important information. Traditionally, issuers complied with Regulation FD (which was intended to prevent issuers from selectively disclosing important information to securities analysts and institutional investors before it was made known to the general public) by disseminating press releases that simultaneously were filed with the SEC. This procedure was a tip-off that the company was releasing important information. Mr. Hastings’ Facebook post – the subject of the SEC’s investigation – announced that Neflix monthly viewing exceeded 1 billion hours for the first time ever in June 2012 and stated that “[w]hen House of Cards and Arrested Development debut, we’ll blow these records away.” Although Netflix and Mr. Hastings maintained that this was not material information, the SEC apparently was not so sure. Last week, Mr. Hastings posted: “House of Cards fav quote: ‘look at the bigger picture.’ Over the last three months, you all watched over 4 billion hours on Netflix. Next up, some real monsters from Eli Roth…” Is Hastings simply promoting Netflix’s original content or is this news that has serious financial implications for the company? Finally, although the Report states that the SEC is “mindful of placing additional compliance burdens on issuers,” won’t issuers now have to increase compliance efforts and review everything that is posted online – even what in the past would have been considered pure advertisement?
The SEC recognized that changes in the ways that people communicate necessitated guidance on the dissemination of material information through social media. But, additional direction is necessary to clarify how these mediums can be used accurately and effectively.
To read more from Catherine Foti, please visit www.maglaw.com