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January 3, 2013

Releasing Corporate Information Via Social Media: SEC Investigates Netflix For Facebook Post

Consumer Advertising Law Blog

As social media becomes more pervasive in today's society, it has become a dominant part of many companies' marketing and public relations strategies. With companies and their executives incorporating Facebook, Twitter and the like into their communications strategies, they often step into grey areas of securities laws. The law that seems to cause the most trouble is Regulation Fair Disclosure (RegFD). Promulgated by the Securities and Exchange Commission (SEC) in 2000, RegFD requires that whenever a company, or a person acting on its behalf, discloses material, nonpublic information to analysts or company stockholders, the company must make that information simultaneously available through broadly disseminated public disclosure. Traditionally, corporations have complied with RegFD by issuing a press release or filing or furnishing a Form 8-K with the SEC.

In recent weeks, a story has come to light that illustrates the growing tension between securities laws and social media communications. On July 3, 2012, Netflix CEO Reed Hastings posted the following message on the company's public Facebook page: "Netflix monthly viewing exceeded 1 billion hours for the first time ever in June [2012]." After this post was broadcast to the company's more than 200,000 Facebook followers, Netflix stock jumped from $67.85 a share on July 2, 2012 -- the day before the post -- to $81.72 on July 5, 2012. As a result, the SEC sent both Netflix and Hastings a letter (known as a "Wells Notice") informing them of the staff's intent to recommend enforcement proceedings for violation of RegFD.

In 2008, the SEC issued guidance that provides clues to how it will likely address Hastings' Facebook post. Whether the SEC will bring an action against Hastings and Netflix will probably depend on: (i) whether the post by Hastings discloses material information; (ii) whether such information was nonpublic; and (iii) if the answer to both (i) and (ii) is "yes," whether the Facebook post constitutes broad, nonselective distribution of such material, nonpublic information.

Is the post by Hastings "material"?

In a public response to the SEC's investigation, Hastings stated: "We think the fact of 1 billion hours of viewing in June was not 'material' to investors." The SEC will likely argue that a 17% jump in stock price in only three days suggests otherwise. Additionally, the SEC will likely point out that Netflix, on recent earnings calls and in prior press releases, has highlighted hours viewed as a key metric. Because Netflix has consistently pointed to this metric in the past, it may now face an uphill battle in arguing the statistic is immaterial.

Did the post by Hastings disclose non-public information?

Netflix stated in a blog entry, posted on its corporate website nearly a month prior to the Hastings Facebook post, that the company was approaching the 1 billion hours viewed milestone. Additionally, Netflix General Counsel, David Hyman, testified before a US House of Representatives committee on June 27, 2012 and during such testimony that Netflix "delivers close to a billion hours of streaming movies and TV shows to its consumers every month." Because of these prior statements, the SEC may have to concede that it was public knowledge that Netflix was close to reaching the 1 billion hours milestone and may be faced with having to prove that there is a material difference between being close to the 1 billion hours milestone and reaching or surpassing such milestone.

Does a Facebook post result in broad distribution of material corporate information?

In other words, and specific to Netflix and Hastings, does a Facebook post broadcast to more than 200,000 individuals provide at least as broad of a disclosure as a press release or an SEC filing? In its 2008 guidance, the SEC stated that when corporations make disclosures via their corporate websites the concern is whether such communications are (i) disseminated in a manner designed to reach the public in general and (ii) being made through a recognized channel of distribution. The SEC likely has the same concerns with respect to corporate social media communications.

On the first point, Hastings and Netflix have stated they believe posting to over 200,000 followers is very public, especially because many of those who subscribe to the Netflix Facebook page are reporters. Hastings and Netflix make a persuasive argument that a Facebook post, which automatically broadcasts to all those individuals that have subscribed to the page, provides a public and transparent means of communications that is more likely to reach the public in general than a filing with the SEC of which no one is automatically notified.

On the second point, the SEC has suggested that corporations can establish recognized channels of distribution by consistently directing investors to such channels in SEC filings and investor relations communications. Unfortunately for Hastings and Netflix, Netflix has not consistently directed investors to Hastings' Facebook posts in its SEC filings and investor communications. Moreover, Hastings stated in his public response to the SEC Wells Notice that "[w]hile we think my public Facebook post is public, we 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 . . . ." Netflix and Hastings could face an uphill battle in arguing Hastings' post disseminated such information via a recognized channel of disclosure.

Regardless of the outcome, corporations and their attorneys will certainly pay close attention to this investigation of Netflix and its CEO, as this could become a precedent setting case or, at a minimum, will provide clues to corporations with respect to the SEC's likely treatment of social media communications going forward.

Update (4/4/2013): For more information on this issue, click here.

© Arnold & Porter Kaye Scholer LLP 2013 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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Julia Vax
Julia Vax
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San Francisco
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