On April 2, 2013, the United States Securities and Exchange Commission (“SEC“) published a report of its investigation on whether Netflix, Inc. (“Netflix“) and its Chief Executive Officer, Reed Hastings (“Hastings“), violated Regulation FD and Section 13(a) of the Securities Exchange Act of 1934 when Hastings announced on his personal Facebook page on July 3, 2012, that Netflix had streamed 1 billion hours of content in the month of June. Though the SEC did not pursue enforcement action in the matter, it clarified in its report that Regulation FD applies to issuer communications and disclosures made through social media channels, and that SEC’s Commission Guidance on the Use of Company Web Sites, Release No. 34-58288 (Aug. 7, 2008) (the “Guide“) also applies to corporate disclosures made through social media channels. The report also suggests that Regulation FD and the Guide apply to “push” technologies, such as email alerts and RSS feeds, and “interactive” communication tools, such as blogs.
Going forward, issuers may use social media channels to communicate with investors and disclose material information without violating Regulation FD if they adequately inform investors and the market that material information will be disclosed through such channels.
Background
The Investigation
On July 3, 2012, Hastings announced on his personal Facebook page that Netflix had streamed 1 billion hours of content in the month of June without an accompanying Form 8-K, press release, or a post on Netflix’s web site or its corporate Facebook page making the same disclosure. Hastings’ personal Facebook page was not previously used by Hastings or Netflix to announce company metrics. Furthermore, shareholders were not previously informed by Netflix that Hastings’ personal Facebook page would be used to disclose information about the company. Netflix’s stock continued a rise that began when the market opened on July 3, increasing from $70.45 at the time of Hastings’ Facebook post to $81.72 at the close of the following trading day. The significant question raised by the investigation was the application of Regulation FD and the Guide to issuer disclosures made through changing forms of communication, including social media channels.
About Regulation FD
Regulation FD provides that an issuer must make public disclosure of material non-public information at the same time that it, or a person acting on its behalf, discloses such information to selected persons, such as investment bankers and research analysts, unless those selected persons have agreed not to trade in the issuer’s securities until the material information becomes public. The purpose of Regulation FD is to make sure all potential buyers and sellers of securities have the same information on which to base a decision to trade.
Regulation FD and the Guide Apply to Social Media Channels
The SEC emphasized in the report that an analysis of whether Regulation FD was violated is “a facts-and-circumstances analysis based on the specific context presented”, and that observing the Guide will help assure compliance with Regulation FD.
The Guide explains that for the purpose of complying with Regulation FD, an issuer makes proper public disclosure when it distributes information “through a recognized channel of distribution.” The Guide offers a non-exhaustive list of factors to be considered in evaluating whether an issuer’s corporate web site is a recognized channel of distribution. This evaluation focuses on whether the issuer has made investors, the market, and the media aware of the channels of distribution the issuer expects to use, so that these parties know what they need to do to be in a position to receive material information about the issuer or where to look for disclosures of such information. Of course, filing an 8-K on EDGAR complies fully with all public disclosure requirements.
The SEC indicated in the report that, although the Guide was primarily directed at the use of issuers’ corporate web sites for the disclosure of material non-public information and as a method of disseminating information in compliance with Regulation FD, the Guide also offers a framework for applying Regulation FD to evolving social media channels of distribution. The SEC reasoned that the Guide specifically identified “push” technologies, such as email alerts and RSS feeds, and “interactive” communication tools, such as blogs, and that evolving social media channels were an extension of such concepts.
The SEC also indicated that the Guide encourages an issuer to include its corporate web site address in its periodic reports and press releases and disclose in such documents that the issuer routinely posts important information on that web site. The SEC explained that disclosure on an issuer’s corporate web site identifying the specific social media channels the issuer intends to use for the dissemination of material non-public information is one of the methods an issuer could use to enable evolving social media channels to become recognized channels of distribution in compliance with Regulation FD and the Guide.
If you have questions about Regulation FD or the Guide, contact any member of Clark Wilson LLP’s Corporate Finance & Securities Law Group.
