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:
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 Regulation FD was enacted in 2000, well before the explosive growth of social media use and the widespread use of social media channels in distributing business information. Many public company executives and employees, as well as investors and media members, are extremely comfortable with the use of social media in this context today, but Regulation FD has not been updated to reflect this change in communication methods.
The SEC has provided limited guidance on disclosure issues associated with the use of electronic communications, but Release Nos. 34-58288, IC-28351 (Commission Guidance on the Use of Company Web Sites) dated August 7, 2008 may be helpful in determining the SEC’s intent regarding disclosure through social media. This Release focused on the use of company websites and did not specifically mention social media, but the SEC clearly established that it supports in concept the dissemination of electronic information through the Internet because of its ability to provide widespread access to company information which is a key component of the SEC’s integrated disclosure scheme. Key considerations to be used in determining when information on a company website is “public” for purposes of Regulation FD (thus avoiding selective disclosure) include whether:
- a company’s website is a recognized channel of distribution of information,
- the posting of information on a company website disseminates the information in a manner that makes it available to the securities marketplace in general, and
- there has been a reasonable waiting period for investors and the market to react to the posted information.
Companies should carefully review these considerations and adopt them to the social media context in the absence of direct SEC guidance. One key item that the SEC makes clear in this Release is that the antifraud provisions of the Federal securities laws apply to any statement that a company makes, or that is attributable to the company, on the Internet.
There is no doubt that the use of social media as a disclosure channel can be problematic in some public company situations. Social media posts are not accessed by or available to all investors (since some investors don’t use social media and are still not aware of its functionality and usefulness). If a public company executive’s social media posts are not widely followed, then perhaps social media is not a good disclosure channel for that company. The scope of an executive’s social media distribution can be monitored and tracked.
Mr. Hastings’ statement brings out important information about his use of social media for disclosure. His Facebook posts are widely followed, and these followers contain a significant number of bloggers and media members who further disseminate the information contained in his original social media postings. I don’t have quantitative data here but the SEC should examine these metrics as part of its analysis of this situation.
It’s also interesting to note that according to Mr. Hastings’ statement, Netflix does not view his Facebook page as a disclosure channel for material information. He believes that the information contained in the Facebook posting had essentially been previously disclosed in blog posts and therefore was not new information.
Other recent executive social media postings have generated comment but (so far) no SEC action. For example, Elon Musk, CEO of Tesla Motors, Inc., tweeted the following message to his 112,000 Twitter followers on December 3: “Am happy to report that Tesla was narrowly cash flow positive last week. Continued improvement expected through year end.” You can find his tweet and the comment that it generated here. It will be interesting to see if the SEC takes any action in this case, especially since this social media post involved a more direct financial metric.
These Wells notices have generated an enormous amount of negative reaction from the business and technology worlds. The overwhelming sentiment appears to be that the SEC is not applying Regulation FD in a realistic and rational manner in this situation or in the social media context given the explosive growth of social media as an information distribution channel. Most commentators feel that the SEC’s actions here are wrong and do not reflect the current status of business communications and social media use (see the recent Huffington Post blog post for a representative sample of the feeling among tech media members). There is also a broad feeling that Regulation FD should be updated and modernized to reflect the use of social media in business communications. Broc Romanek does a nice job of analyzing this matter in his recent TheCorporateCounsel.net blog post (Broc carries the discussion further in this post to touch on companies that use third party investor relations firms to manage their websites – a related problem that needs some attention).
It’s clearly time for a change here. Social media use is now widespread enough (especially with the inherent ability of social media posts to be quickly and easily passed on to other recipients) to serve as a channel for the fair and compliant distribution of public company disclosure information. The SEC should maintain the use of Regulation FD, as it provides substantial protection to investors in certain contexts. The SEC needs to take the time, however, to critically review the widespread use of social media in business communications and to adopt an updated and realistic framework for the use of social media as a public company disclosure method. I believe that an analysis of the true distribution of material information (including sharing, retweeting and other methods of passing such information on) will clearly satisfy both the letter and the intent of Regulation FD. Social media use will continue to grow strongly (especially through its explosive growth on mobile devices), and the SEC and its rules need to reflect this.