December 2012

Following up on my post on the subject, I had the chance to speak with Colin O’Keefe of LXBN regarding the SEC sending a Wells notice to Netflix and its CEO over a Facebook post the latter made. In the interview, I explain what happened, why the SEC is displeased and why it needs to do more to make sure its rules and regulations reflect the changing technological landscape.

The use of social media as a public company information channel encountered a roadblock on December 5, 2012 as Netflix, Inc. and its CEO, Reed Hastings, both received Wells notices from the SEC regarding a prior Facebook post that Mr. Hastings had made. A Wells notice is a notification from the SEC that it intends to recommend enforcement action against a company or individual. This notice also gives the affected parties an opportunity to explain why such an action is not appropriate. 

Mr. Hastings’ July 2012 Facebook post congratulated the company’s content licensing team for exceeding a milestone in monthly viewing hours. It also contained a positive prediction regarding future monthly viewing hours. Netflix did not issue a Form 8-K, a press release or any other disclosure at the time of this post. Mr. Hastings has made a habit of posting company information on his Facebook page. Here is the post that is the subject of the Wells notice:

 FD issue for Netflix

Netflix filed a Form 8-K regarding this matter on December 5, 2012. According to this 8-K, the Wells notices indicated that the SEC staff intended to recommend that the SEC institute a cease and desist proceeding and/or bring a civil injunctive action against Netflix and Mr. Hastings for violations of Regulation FD, Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 and 13a-15 under the 1934 Act. Mr. Hastings also provided a statement that was attached as an Exhibit to this Form 8-K. The statement clearly indicates his feeling that the SEC’s application of Regulation FD is incorrect here. 

Regulation FD prohibits selective disclosure of material information. This regulation was enacted to prevent public companies from selectively releasing material information to certain shareholders or other parties without broad distribution. For example, Regulation FD prevents a company from selectively providing information to certain friendly investment analysts or major shareholders before it is publicly. The policy behind this rule is that all investors should have equal access to material information. 

Regulation FD is conceptually a good rule, as it helps to level the playing field among investors and interested parties. The real problem in the social media context is that Continue Reading Netflix CEO’s Facebook post leads to possible Regulation FD action by SEC – Time for some changes

General Solicitation and Stock SalesFor securities issuers, the most widely used exemption from registration is the private offering exemption in Section 4 of the Securities Act. Formerly referred to as the “Section 4(2)” exemption, the enactment of the JOBS Act in April of this year fixed the section numbering in Section 4 of the Securities Act which, until now, had not conformed to the alternating number-letter-number format contained in the other sections of that Act. Thus, the old 4(2) private offering exemption is now the Section 4(a)(2) exemption, although many issuers and practitioners have failed to realize this administrative change as evidenced by recent Form 8-K filings pursuant to Item 3.02 which still make reference to the “Section 4(2)” private offering exemption as the applicable exemption relied upon for their respective unregistered securities offerings.

But aside from this administrative fix, has the JOBS Act actually changed the exemption requirements itself? Arguably it has as I will hypothesize in this post.

Most securities professionals are aware that the JOBS Act requires the SEC to amend Rule 506 to permit general solicitation and advertising in connection with a private offering in which all purchasers are “accredited investors.” Many people mistakenly refer to Rule 506 as an “exemption” but it is not actually an exemption per se. Rather, the SEC adopted Rule 506 to provide a safe harbor to give definitive guidance to issuers who undertook private placements of their securities under then-Section 4(2) (now Section 4(a)(2)) as to what criteria must be satisfied to provide certainty to the issuer that their offering complied with the private offering exemption. Simply put, if you meet the requirements of Rule 506, then the offering is exempt pursuant to Section 4(a)(2).

Prior to the adoption of Rule 506 which established definitive criteria for compliance with the private offering exemption, the 4(a)(2) exemption standards were developed through case law over the years. The famous Ralston Purina case and its progeny focused on three primary factors to consider in determining whether the private offering exemption applied based on Continue Reading Did the JOBS Act unintentionally change the statutory private offering exemption?