Yesterday Netflix filed a Form 8-K disclosing that it and its CEO, Reed Hastings, have each received a “Wells notice” indicating that the Staff of Securities and Exchange Commission intends to recommend that the Commission institute a cease and desist proceeding or bring a civil injunctive action or both against Netflix and Hastings for violations of Regulation FD related to a posting on Hastings’ Facebook page back in July.
Here’s the posting at issue:
Here’s Hastings’ response, also posted on his Facebook page a few moments after it was filed as an exhibit to Netflix’s Form 8-K:
Regulation FD requires that whenever a company or, as in this case, someone acting on a company’s behalf, discloses material nonpublic information to certain market participants it must also disclose that information publicly—simultaneously, in the case of an intentional disclosure, and promptly, in the case of an unintentional disclosure. The public disclosure requirement can be satisfied by filing a Form 8-K or by any other method reasonably designed to provide broad, non-exclusionary distribution of the information to the public.
Hastings’ strongest argument is that the information was not material and therefore Regulation FD should not come into play at all. However, the more interesting argument is that information posted on his Facebook page “is very public”, which implies that even if the information in question was material, posting it on Facebook would constitute a public disclosure in compliance with the requirements of Regulation FD.
The difficulty with such a conclusion is that, as Hastings notes, Netflix “doesn’t currently use Facebook and other social media to get material information to investors … .”
For purposes of Regulation FD, information posted on a company’s website is public once it has been disseminated in a manner calculated to reach investors in general through recognized channels of distribution and investors have been afforded a reasonable waiting period to react to that information.
It would be challenging to cast Hastings’ Facebook page as a recognized channel of distribution for one instance of disclosure, particularly since investors haven’t been alerted to the fact that Netflix intended to use the page as such.
This is definitely a matter to follow, as there hasn’t been much, if anything, in the way of new guidance from the Commission on the use of company websites and social media since its 2008 release. I imagine the matter will settle around the issue of whether the information disclosed was material, but it’ll still be informative to see what arguments are raised and what position the Commission ultimately takes.
It’s also a good reminder to occasionally dust off and review your social media policy with everyone in the company.