Social Media and Reg FD: The Netflix 21(a) Report
The SEC clarified its view on the use of social media in the context of making disclosures and complying with Regulation FD in an Exchange Act Section 21(a) Report of Investigation. The Report grows out of the investigation by the Enforcement Division into certain disclosures made by the Chairman of Netfilx, Inc. on his Facebook page regarding the success of the firm’s streaming business. Exchange Act Release No. 69279 (April 2, 2013), Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934, Netflix, Inc., and Reed Hastings.
Netflix has focused on expanding its streaming business for subscribers over the past two years. In early January 2012 the company announced in a press release that it had streamed two billion hours of content in the fourth quarter of 2011. That metric was also featured in other subsequent disclosures. While the streaming metric did not specifically drive revenue since Netflix is a subscriber based service, its President, Reed Hastings, explained in a late January 2012 conference call that it is “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 it] shows widespread adoption and usage of the service.”
In early June Netflix made a brief reference on its blog to people enjoying nearly “a billion hours per month . . . “ of content. In a July 3, 2012 post on his personal blog Mr. Hastings made a specific statement about the adoption of the streaming service stating in part: “Netflix monthly viewing exceeded 1 billion hours for the first time ever in June.” Later the same day the company issued a press release announcing the date of its second quarter earnings release. It did not mention the Facebook posting by Mr. Hastings.
The stock price began to rise at the open on July 3 and continued after the 11:00 a.m. Facebook post. About noon on the same day the Facebook post was disseminated to several reporters. Following an early market close the story was picked up by the media. The Facebook post sparked the Enforcement investigation.
In the Release the Commission clarified its guidance regarding the use of social media in the wake of the Netflix investigation. The agency decided not to bring an enforcement action.
Regulation FD requires that an issuer discloses material nonpublic information to securities market professionals or shareholders where it is reasonably foreseeable that they will trade on the basis of the information in a manner reasonably designed to achieve effective broad and non-exclusionary distribution to the public. When the disclosure is intentional, distribution to the public must be simultaneous. While no particular method of distribution is required, if an issuer deviates from its customary approach, it may impact any determination as to whether the method selected is reasonable under the circumstances.
In August 2008 the Commission issued Guidance on the use of electronic media and disclosure focused largely on corporate websites. In that Guidance the Commission encouraged the use of the electronic media, according to the Report, while noting that the investing public must be alerted to the channels of distribution the company will use. It also provided a non-exclusive list of factors to be considered in evaluating if the corporate website constituted a recognized channel of distribution. It did not specifically address the use of social media.
In considering the use of social media as was done by Netflix, there are two critical issues. The first centers first on the application of Reg FD. In this regard it is important that the company evaluate statements made through the social media in the context of Reg FD. Specifically, when an issuer “makes a disclosure to an enumerated person [in FD], including to a broader group of recipients through a social media channel, the issuer must consider whether that disclosure implicates Regulation FD . . . if the issuer were to elect not to file a Form 8-K, the issuer would need to consider whether the information was being disseminated in a manner ‘reasonably designed to provide broad, non-exclusionary distribution . . . ’” of the information.
Second, the August 2008 Guidance, while not directed specifically at the social media, should be considered. The critical point here is to “alert 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 . . . “ While every case must be evaluated based on its specific facts “without advance notice to investors that the site may be used for this purpose, [it] is unlikely to qualify as . . . “ an appropriate method for Reg FD. Applying this two prong approach should result in adherence to Reg FD and the August 2008 Guidance “with minimal burden,” according to the Release.