In July 2012 Netflix, Inc. (“Netflix”) Chief Executive Officer, Reed Hastings, posted a seemingly innocuous statement to his personal Facebook page:
Congrats to Ted Sarandos, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away. Keep going, Ted, we need even more!
Mr. Hastings did not post that information on Form 8-K, the Netflix website, the Netflix Facebook page, or in any other public medium. Critically, Netflix’s shareholders were not separately informed of the above information.
As a result of that post, the Securities and Exchange Commission (“SEC”) announced approximately six months later that it was investigating whether to bring an enforcement action against Netflix and Mr. Hastings for potential violation of Regulation FD.
Regulation FD, which stands for “Fair Disclosure,” became effective in October 2000 and is codified at 17 CFR 243.100-243.103 (“RegFD”). According to the SEC, RegFD seeks to address:
- The selective disclosure by issuers of material nonpublic information;
- When insider trading liability arises in connection with a trader’s “use” or “knowing possession” of material nonpublic information; and
- When the breach of a family or other non-business relationship may give rise to liability under the misappropriation theory of insider trading. (See: SEC Release Nos. 33-7881; and 34-43154).
At its core, RegFD requires a public company representative who discloses material nonpublic information to certain individuals, (generally, securities market professionals and shareholders who may trade on the basis of the information) to issue either a “prompt” or “simultaneous” disclosure of the same information to the public (depending upon whether the initial disclosure was intentional or accidental).
Luckily for Netflix, on April 2, 2013, the SEC issued a “Report of Investigation Pursuant to Section 21(a) of the Securities Act of 1934: Netflix and Reed Hastings” (the “2013 Report”) in which it stated it would not pursue an enforcement action. However, the SEC only refrained from an enforcement action because its investigation revealed: “there is uncertainty concerning how Regulation FD and the Commission’s 2008 Guidance apply to disclosures made through social media channels.”
Now that the SEC has ostensibly removed all uncertainty by releasing the 2013 Report, public companies and its representatives should proceed with caution when releasing company information on a personal social media site.
As stated in the 2013 Report:
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.
Accordingly, before posting any such information, public companies and their representatives should consider:
- Whether the potential post contains material, nonpublic information;
- Whether the company has provided appropriate notice to investors of the specific channels that it will use for the dissemination of material, nonpublic information; and
- If the information will be disseminated in such a way reasonably designed to provide broad, non-exclusionary distribution of information to the public.