On April 2, 2013, the SEC provided guidance on the use of social media to disclose company information in a Report of Investigation under Section 21(a). The investigation concerned Netflix's chief executive officer (CEO) posting on his individual Facebook page that the company streamed 1 billion hours of programs within a month. The post was not accompanied by a press release, a post on Netflix's own website or a Form 8-K. The SEC investigated whether this violated Regulation FD and Section 13(a) of the Exchange Act but ultimately determined not to pursue an enforcement action in this matter.
Regulation FD and Section 13(a) of the Exchange Act ban public companies from selectively disclosing material, nonpublic information to certain securities professionals or shareholders, where it is reasonably foreseeable that they will trade on that information, before it is made available to the general public. In 2008, the SEC provided guidance explaining that a company makes public disclosure when the information is published "through a recognized channel of distribution."
As a result of the Netflix investigation, the SEC realized that the 2008 guidance it previously provided did not discuss how Regulation FD and Section 13(a) of the Exchange Act applied to disclosures made through social media channels. The 2008 guidance was directed primarily at the use of issuer websites as a method of disseminating information in compliance with Regulation FD. The guidance addressed whether a company's website is a "recognized channel of distribution" and provided a non-exhaustive list of factors to be considered in evaluating whether a corporate website constitutes a recognized channel of distribution. The SEC noted that the central focus of this inquiry is whether the company has made investors, the market and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company.
The post from Netflix's CEO was especially problematic because his Facebook page had not been previously used to distribute material, nonpublic information and the company had not filed the information with the SEC or provided the information on the company's actual Facebook page. The public, especially investors, were not made aware that this material, nonpublic information would be available on the CEO's Facebook page because the public instead was directed to the company's Facebook page and Twitter account, as well as the company's website.
The SEC clarified in the report that issuer communications through social media channels require careful Regulation FD analysis comparable to communications through more traditional channels. In addition, the SEC clarified that the 2008 guidance, specifically the concept that the investing public should be alerted to the channels of distribution a company will use to disseminate material information, also applies to corporate disclosure made through social media. This means companies need to alert the public about what methods of distribution the company will use to provide material information. If the company chooses not to file a Form 8-K to disclose the information, the company needs to evaluate whether the information is being disseminated in a manner that is "reasonably designed to provide broad, non-exclusionary distribution of the information to the public."
The SEC further advises that when a company posts material, nonpublic information on social media and does not provide the public with notice of this fact, the method is not likely to qualify as "reasonably designed to provide broad, non-exclusionary distribution of the information to the public."