Many CEOs have now obtained celebrity-like status. And like their Hollywood counterparts, they have made themselves more digitally connectable through social media. Last July, Reed Hastings (CEO of Netflix) announced to 200,000+ of his dearest “friends” that his company had streamed 1 billion hours of its online library during the single month of June. His forum was not a quarterly earnings call or an official press release, but instead his Facebook wall. Here’s the actual post (no, I’m not Facebook friends with Reed…my friend request was blocked due to an excessive number of pending friend requests in Reed’s queue):
The SEC’s Division of Enforcement, concerned that Hastings may have violated Regulation FD, began a formal investigation that led to a report issued on April 2, 2013 (the “Report”).
Reg FD Refresher
In a nutshell, Regulation FD says that when a company shares material, non-public information to securities professionals (think investment advisers) or shareholders where such information would be a basis for making an investment decision, then the company must contemporaneously share that same information to the public at large. As the SEC stated in its report, “Regulation FD was adopted out of concern that issuers were selectively disclosing important nonpublic information, such as advance warning of earnings results, to securities analysts or selected institutional investors before making full disclosure of the same information to the general public.” The Commission went on to say,
In our previous statements on Regulation FD, we have recognized that the regulation does not require use of a particular method, or establish a “one size fits all” standard for disclosure. We did, however, caution issuers that a deviation from their usual practices for making public disclosure may affect our judgment as to whether the method they have chosen in a particular case was reasonable.
The SEC’s 2008 Guidance
In 2008, the SEC issued a report entitled Commission Guidance on the Use of Company Web Sites (the “Guidance”). In the 2008 Guidance, the SEC addressed the growing use by public companies of the internet as a means for disseminating (either intentionally or inadvertently) material, non-public information. At the time, the Commission was primarily concerned with companies’ websites, although the Guidance certainly acknowledged that internet technology and media may change in the future, so cautioned against a rigid interpretation of the Guidance.
As explained in the 2008 Guidance,
Whether a company’s web site is a recognized channel of distribution will depend on the steps that the company has taken to alert the market to its web site and its disclosure practices, as well as the use by investors and the market of the company’s web site.
And then restated slightly in the Netflix Report,
The central focus of this [recognized channel] inquiry is whether the company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information.
Social Media as a Channel
In issuing the Report, the SEC took the opportunity to expound on Regulation FD in an effort to clarify its application to disclosures made through social media channels. Using the facts of the Netflix CEO’s Facebook posting as its backdrop (although they stressed every cases will be determined on its own facts), the SEC made two key points:
- A company’s communications through social media require careful Regulation FD analysis; and,
- The 2008 Guidance applies by extension to disclosures made via social media.
So, if a company finds itself in a position like Netflix, the key question seems to be whether the social media channel, in a given case, provides an avenue for the information to be disseminated in a manner reasonably designed to provide “broad, non-exclusionary distribution of the information to the public.” And, more specifically, whether the particular forum is a “recognized channel” of distribution for communicating with the company’s investors. The SEC does not provide a bright-line rule, but instead points to factors that may support a finding that a given social media channel is a “recognized channel,” for example,
Disclosures on corporate web sites identifying the specific social media channels a company intends to use for the dissemination of material non-public information 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.
So, did Hastings’ Facebook Post Violate Regulation FD?
Interestingly, the Report makes clear that Hastings’ post would generally run afoul of Regulation FD, when evaluated in light of the established channels that Netflix made use of prior to the post. The Commission states,
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. (emphasis added)
Moreover, the Report highlights a series of facts that would seem to cut against Netflix’s position:
- The information Hastings disclosed was “material”
During Netflix’s 2011 year-end and fourth quarter earnings conference call on January 25, 2012, Hastings was asked why this streaming metric was relevant (since Netflix’s revenues are derived through fixed subscriber fees, not based on the number of hours of programming viewed). Hastings explained that streaming was “a measure of an engagement and scale in terms of the adoption of our service and use of our service. . . . . It [two billion hours streaming in a quarter] is a great milestone for us to have hit. And like I said, shows widespread adoption and usage of the service.”
Netflix’s stock continued a rise that began when the market opened on July 3, increasing from $70.45 at the time of Hastings’s Facebook post to $81.72 at the close of the following trading day.
- The information Hastings disclosed was “nonpublic”
Prior to his post, Netflix did not file with or furnish to the Commission a Current Report on Form 8-K, issue a press release through its standard distribution channels, or otherwise announce the streaming milestone.
- Hastings’ Facebook page implicates Regulation FD since the material, nonpublic information was shared with at least some shareholders and securities professionals
Facebook members can subscribe to Hastings’s Facebook page, which had over 200,000 subscribers at the time of the post, including equity research analysts associated with registered broker-dealers, shareholders, reporters, and bloggers.
- Hastings’ Facebook page is probably not a “recognized channel of distribution”, such that disclosure of this material, nonpublic information was not made to the general public
Neither Hastings nor Netflix had previously used Hastings’s Facebook page to announce company metrics. Nor had they taken any steps to make the investing public aware that Hastings’s personal Facebook page might be used as a medium for communicating information about Netflix. Instead, Netflix has consistently directed the public to its own Facebook page, Twitter feed, and blog and to its own web site for information about Netflix. In early December 2012, Hastings stated for the public record that “we [Netflix] don’t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings.”
Yikes, this sounds like Netflix is going to get pummeled by the Commission, right? Wrong. The SEC surprisingly declined to file an enforcement action against Netflix based on Hasting’s Facebook post. The Commission stressed their policy position that communication with investors is a good thing, stating in relevant part,
We do not wish to inhibit the content, form, or forum of any such disclosure, and we are mindful of placing additional compliance burdens on issuers. In fact, we encourage companies to seek out new forms of communication to better connect with shareholders.
So, it remains somewhat unclear what facts would trigger an enforcement action on a Regulation FD theory in the social media disclosure context. But, what is clear, is that the SEC has taken notice of social media communications made by, or on behalf of, publicly traded companies. Whether, and to what extent, the Commission is prepared to exercise their enforcement authority in this arena remains to be seen.
Takeaways, if any
Ultimately, what should be gleaned from the Commission’s Report is that although there may be corporate marketing or branding benefits that are gained with an accessible CEO, there are also legal constraints that must be considered when this CEO takes to the social network scene to share company-related information. Companies should immediately self-audit and determine what social media or networks are in use by its officers and directors, and with that information determine whether such outlets should (or could) become a distribution channel of information. Armed with a listing of “potential” distribution channels (i.e., those not traditionally used for distributing information), the company should then publish (on their website, Form 8-K, and/or press releases) the identity (whether corporate or personal, as with Reed Hasting’s) associated with these social media channels, their web/app location, and the method for registering or subscribing to receive updates. And, as always, corporate counsel and compliance officers should provide proactive training to their officers and directors on the proper use of social media, thereby maximizing the commercial benefits to the company while mitigating the inherent risks of such conduct.