The Green Light to Social Media Use for Regulation FD Purposes Looks More Like Yellow
I was excited to see the SEC’s press release about its report of investigation related to Netflix and social media issues yesterday. The report (i) brings closure to the Division of Enforcement investigation of whether Netflix, Inc. and its CEO, Reed Hastings, violated Regulation FD and Section 13(a) of the Securities Exchange Act of 1934 (see previous blog posts and coverage in Up to Date newsletter about Netflix and Mr. Hastings each receiving a “Wells Notice” from the SEC Staff in connection with Mr. Hastings’ July 2012 announcement on his Facebook page that Netflix’s monthly viewing exceeded 1 billion hours) and (ii) provides guidance on the use of social media for Regulation FD purposes.
The report brings good news that the SEC determined not to pursue an enforcement action against Netflix and Mr. Hastings (a different determination was likely to have a chilling effect on corporate communications via social media channels). And even more significantly, the SEC uses this report as a forum to extend the principles set forth in its 2008 Guidance on the Use of Company Web Sites (2008 Guidance) to announcements made through social media channels (e.g., Facebook and Twitter) for Regulation FD compliance purposes.
The cornerstone of Regulation FD is the concept that material non-public information should be disseminated in a manner “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” When the SEC issued its 2008 Guidance, it officially acknowledged that a company’s website could serve as a broad, non-exclusionary method of distribution of the information to the public under Regulation FD, provided such website was a recognized channel of distribution. The SEC now expects issuers “to examine rigorously the factors indicating whether a particular [social media] channel is a ‘recognized channel of distribution’ for communicating with their investors.”
The SEC’s report emphasizes the importance of providing notice to “the market about which forms of communication a company intends to use for the dissemination of material, non-public information, including the social media channels that may be used and the types of information that may be disclosed through these channels.” The SEC suggests that “disclosures on corporate websites identifying the specific social media channels a company intends to use … would give investors and the markets the opportunity to take the steps necessary to be in a position to receive important disclosures — e.g., subscribing, joining, registering, or reviewing that particular channel.” Netflix chose to file a Form 8-K on April 10, 2013 encouraging investors and the media to review the information posted on the social media channels listed in its Form 8-K, including Mr. Hastings’ Facebook page.
However, in addition to the notice to investors, applying the 2008 Guidance, there are other factors that are important in the determination of whether the company’s website, and now social media channels, can be viewed as “recognized” channels of distribution of information. For example, companies should evaluate “the extent to which information posted … is regularly picked up by the market and readily available media, and reported in, such media … and the size and market following of the company involved.”
Having read the report, my initial excitement has faded. The SEC guidance leaves a company to perform a difficult facts-and-circumstances analysis of whether the company’s website or Facebook page is a recognized channel of distribution of information to the investing public even if the company provides the required notice to investors. In the absence of a clear definition of what constitutes such “recognized channel,” companies may not be utilizing the full potential of the SEC’s 2008 Guidance and its 2013 extension to social media channels.
