After Netflix CEO Reed Hastings posted on his personal Facebook page that Netflix users had streamed more than one billion hours of video the previous month, he probably wasn’t expecting a notice from the SEC. However, shortly after Hastings’s Facebook update and the subsequent spike in the value of Netflix shares on the same day, that’s exactly what happened. While the matter was dropped, the incident served as the impetus for last week’s report from the SEC regarding allowable disclosures on social media platforms.
Increased access – or at least the illusion of it – is one of the many side-effects of social media. Following a CEO of a company you admire or liking a post from a local politician lets you reach out to influential figures in a way previous generations could never have imagined. That connection, however, is not without a price. As Hastings and Netflix found out, companies must communicate with their customers and shareholders with an eye towards good practices and government regulations. This has always been the case, but the SEC is just now catching up to regulating these sorts of interactions that happen on social media.
When Hastings posted on Facebook, the SEC relied on Regulation Fair Disclosure (better known as Regulation FD or Reg FD) as the basis to determine if Netflix was in violation of any laws or regulations. Proskauer Rose’s Wai Choy explaieds in detail what Regulation FD requires on the firm’s New Media and Technology Law Blog:
“To promote securities market fairness, Regulation Fair Disclosure, or Reg FD, and Section 13(a) of the Exchange Act prohibit public companies and persons acting on their behalf from selectively disclosing material, nonpublic information to certain securities market professionals or shareholders where it is reasonably foreseeable that they will trade on that information, before that information is made available to the general public. Under Reg FD, such information must be publicly filed with the SEC in a Current Report on a Form 8-K unless disclosed in a way that is “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.””
Whether or not Netflix was in violation of Reg FD was open to interpretation. Hastings made no effort to make the information available to the “general public”, and with Netflix shares jumping %6.2 the same day (the highest jump in a single day to that point), it’s safe to say that “securities market professionals” were trading based on the news. However, David Smyth of Brooks Pierce points out on the firm’s blog, Candy Bar the Door, there were other mitigating factors that lead some to believe the SEC needed to adapt their regulations to the way changing technologies reach increasingly large audiences:
“The problem for the SEC was, Hastings’s Facebook account had over 200,000 followers at the time of his post. He wasn’t exactly leaking this billion-hour number to a tiny club. But the post also was not accompanied by a parallel Form 8-K and press release, the safest way for a public company to release information and ensure, from the SEC’s perspective, that the company is putting all recipients on an equal footing. Reaction to the Wells notice was not positive. Broc Romanek, a former CorpFin staff member and an eminently sensible voice in this space, said flatly at the time, “This is a hard one for me to swallow.” The consensus from many was that the SEC needed to get with the times and consider that in the right circumstances, dissemination of material, nonpublic information by social media outlets could be sufficiently general disclosure for Reg. FD.”
Fortunately for Netflix, the SEC agreed, but also made clear in it’s latest report that future communications on social media channels will be closely watched. While the Commission has no plans to ban disclosures on social media, there are now a series of guidelines companies must follow to avoid investigations. Michael Epshteyn provided a quick summary of those guidelines on Hogal Lovells’s Focus on Regulation:
“The report encourages companies to identify on their corporate web sites the specific social media channels that they intend to utilize for the dissemination of material nonpublic information to give investors and the market the opportunity to take steps necessary to subscribe to, join, register for or review that channel. The report also notes that, although every case must be evaluated on its own facts, the 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 meet Regulation FD requirements even if the individual has a large number of subscribers, friends or other social media contacts.”
However, like most guidelines, there are some ambiguities. While the SEC made clear that disclosures on personal social media accounts would be acceptable if investors had been given advance notice of the account’s intended purpose, there are still areas that can give companies headaches. To aid those companies, Erin Siegfried proposed on Porter Wright’s Federal Securities Law Blog that theyask themselves a few questions before disclosing important materials on any social media accounts:
“The SEC expects issuers to rigorously examine the factors outlined in its 2008 website guidance that are taken into account when determining whether a particular channel is a recognized channel of distribution for communicating with investors. A company should ask itself several questions. Is the proposed channel of distribution one that is practical for investors to monitor? Do investors need “lead time” to register to use the channel of distribution? Is the company comfortable using only that channel of distribution for communications to investors?”
For many members of LXBN, the advice was simple: Pay attention to these new rules. David Lynn of Morrison Foerster said on the firm’s blog Socially Aware that companies should simply be more cognizant of how social media is addressed and regulated in their policies, and they should keep an eye towards how these regulations evolve as technology changes. Rick Jordan noted on Gardere’s From the SOX Up that while smaller reporting companies faced different levels of scrutiny, they should still take heed of this guidance.
As Smyth said later in his post, there is no way for the SEC to craft a report that covers all of the possible scenarios involving disclosures on social media platforms, but this report serves as a welcome starting point for companies utilizing social media to help communicate with shareholders and other interested parties:
“While the SEC’s report is not the green light for corporate social media use that many have been hoping for, I think it is a fairly reasonable reaction as companies get deeper into these waters. It would be terribly difficult to write a rule outlining exactly what is okay and what is not. Reed Hastings’s post to 200,000+ followers seems reasonable to me, especially given that those followers would quickly re-post the same information to others. If he opened a brand new Twitter account and tweeted material, nonpublic Netflix information to three followers who then traded and profited on that information, it’s safe to say enforcement action would follow. Any rule or definitive guidance would have to take into account, at least, numbers of followers, the network at issue, whether investors recognized it as a place to learn corporate information, and frequency of updates on the network. “
Like the FTC’s recent update to its online marketing guidelines, the SEC can only say so much in a few pages. For any confused executives or companies, the answer is simple, as Choy laid out toward the end of his post, “Execs, don’t try this at home”:
“While Netflix and Mr. Hastings received a free pass on Mr. Hastings’s Facebook post, the SEC’s message is clear: Execs, don’t try this at home. “Although every case must be evaluated on its own facts, 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 SEC stated in its Report of Investigation. The safest bet is still to file sensitive disclosures in a Form 8-K, but the SEC’s latest guidance has opened the door to the use of social media posting as an independently sufficient form of disclosure.”
To read more analysis from LXBN members, check out LXBN’s dedicated section on the SEC’s guidance for social media disclosures.
Photo Credit: ebayink, Flickr.com