Co-authored by Andrew M. Halbert.
On April 2, in connection with an investigation of Netflix, Inc. and its Chief Executive Officer, Reed Hastings, regarding a possible violation of Regulation FD, the Securities and Exchange Commission released a Report of Investigation clarifying a company is permitted to use social media outlets such as Facebook and Twitter to provide important company information to the public pursuant to Regulation FD, so long as those social media outlets are viewed as “recognized channels of distribution” and the company first takes “steps sufficient to alert investors and the market to the channels it will use for the dissemination of material, nonpublic information.”
Regulation FD requires that if an issuer or its representatives discloses material, nonpublic information to stockholders or securities market professionals in a situation where it is reasonably foreseeable that such investors or professionals will trade on the basis of this information, the same information must be distributed to the public simultaneously for intentional disclosures and promptly for non-intentional disclosures. The investigation by the SEC was initiated after Mr. Hastings made a post on his personal Facebook page regarding the hours of content streamed by Netflix in June of 2012, which coincided with an increase in the stock price of Netflix. Prior to this post, the Facebook page of Mr. Hastings had not been used to announce any metrics of Netflix, and Netflix had not indicated to the public or its shareholders that Mr. Hastings’s Facebook page would be used to disclose information regarding Netflix. In addition, Netflix did not file a Form 8-K, issue a press release or make a post on its own Facebook page to accompany the disclosure posted by Mr. Hastings.
In the Report of Investigation, the SEC made clear that communications by issuers using social media outlets, just like communications made through more traditional channels, must be analyzed carefully for compliance with Regulation FD, and confirmed that the guidance it issued in 2008 regarding the application of Regulation FD to dissemination of information through a company’s website also applies to the dissemination of information through social media outlets. In that 2008 guidance, the SEC stated that for a company’s website to serve as a broad, non-exclusionary method of distributing information to the public pursuant to Regulation FD, the website must be a “recognized channel of distribution” for communicating with the company’s investors. This requirement is also applicable to social media outlets, and in the Report of Investigation, the SEC reminded companies that it expects them to “examine rigorously the factors indicating whether a particular channel is a recognized channel of distribution.”
The SEC also emphasized that, consistent with the guidance issued in 2008, providing investors with appropriate notice of the forms of communication that a company plans to use to disclose material, nonpublic information, including information regarding any social media outlets that may be used for such purpose and the types of information that may be disclosed through these outlets, is “critical to the fair and efficient disclosure of information.” One possible way to provide this notice to investors, as suggested by the SEC in the Report of Investigation, is to include disclosure on a company’s corporate website identifying the specific social media outlets through which that company intends to disseminate material, nonpublic information.
Based on this analysis, the SEC stated in the Report of Investigation that “disclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to qualify as a method reasonably designed to provide broad, non-exclusionary distribution of the information to the public within the meaning of Regulation FD.”
The Report of Investigation is available here.