The Green Light to Social Media Use for Regulation FD Purposes Looks More Like Yellow

I was excited to see the SEC’s press release about its report of investigation related to Netflix and social media issues yesterday.  The report (i) brings closure to the Division of Enforcement investigation of whether Netflix, Inc. and its CEO, Reed Hastings, violated Regulation FD and Section 13(a) of the Securities Exchange Act of 1934 (see previous blog posts and coverage in Up to Date newsletter about Netflix and Mr. Hastings each receiving a “Wells Notice” from the SEC Staff in connection with Mr. Hastings’ July 2012 announcement on his Facebook page that Netflix’s monthly viewing exceeded 1 billion hours) and (ii) provides guidance on the use of social media for Regulation FD purposes. 

The report brings good news that the SEC determined not to pursue an enforcement action against Netflix and Mr. Hastings (a different determination was likely to have a chilling effect on corporate communications via social media channels).  And even more significantly, the SEC uses this report as a forum to extend the principles set forth in its 2008 Guidance on the Use of Company Web Sites (2008 Guidance) to announcements made through social media channels (e.g., Facebook and Twitter) for Regulation FD compliance purposes. 

The cornerstone of Regulation FD is the concept that material non-public information should be disseminated in a manner “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” When the SEC issued its 2008 Guidance, it officially acknowledged that a company’s website could serve as a broad, non-exclusionary method of distribution of the information to the public under Regulation FD, provided such website was a recognized channel of distribution.  The SEC now expects issuers “to examine rigorously the factors indicating whether a particular [social media] channel is a ‘recognized channel of distribution’ for communicating with their investors.”  

The SEC’s report emphasizes the importance of providing notice to “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.”  The SEC suggests that “disclosures on corporate websites identifying the specific social media channels a company intends to use … would give investors and the markets the opportunity to take the steps necessary to be in a position to receive important disclosures — e.g., subscribing, joining, registering, or reviewing that particular channel.”  Netflix chose to file a Form 8-K on April 10, 2013 encouraging investors and the media to review the information posted on the social media channels listed in its Form 8-K, including Mr. Hastings’ Facebook page.

However, in addition to the notice to investors, applying the 2008 Guidance, there are other factors that are important in the determination of whether the company’s website, and now social media channels, can be viewed as “recognized” channels of distribution of information.  For example, companies should evaluate “the extent to which information posted … is regularly picked up by the market and readily available media, and reported in, such media … and the size and market following of the company involved.” 

Having read the report, my initial excitement has faded.  The SEC guidance leaves a company to perform a difficult facts-and-circumstances analysis of whether the company’s website or Facebook page is a recognized channel of distribution of information to the investing public even if the company provides the required notice to investors.  In the absence of a clear definition of what constitutes such “recognized channel,” companies may not be utilizing the full potential of the SEC’s 2008 Guidance and its 2013 extension to social media channels.

Netflix’s CEO Facebook Post Triggers a Debate

We have previously blogged about and covered in our Up to Date newsletter the fact that Netflix and its CEO, Reed Hastings, each received a “Wells Notice” from the SEC Staff over Hastings’ Facebook post in July 2012, in which Mr. Hastings wrote that Netflix’s members had enjoyed over one billion hours in June 2012.  The SEC Staff indicated in the Wells Notice its intent to recommend to the SEC that it institute a cease and desist proceeding and/or bring a civil injunctive action against the company and Mr. Hastings for violations of Regulation FD, Section 13(a) of the Securities Exchange Act and Rules 13a-11 and 13a-15.

Mr. Hastings continues to post on Facebook and said in an interview last week referring to his July post, “I’m not going to back down and say it’s inappropriate. I think it’s perfectly fine. Sometimes you’re just the example that triggers the debate.”  Mr. Hastings post has indeed triggered the debate of what constitutes “public disclosure” of material information under Regulation FD. 

Regulation FD requires a public company to publicly disclose material, non-public information (oral or written) that is selectively disclosed to market professionals and securityholders.  Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.  

Despite this broad approach, from the time of the adoption of Regulation FD in 2000 until August 2008, a press release or a Form 8-K was practically the only form of distribution of information under Regulation FD.  In August 2008, when the SEC issued its Guidance on the Use of Company Web Sites (2008 Guidance) it officially acknowledged that a company website could serve as a broad, non-exclusionary method of distribution of the information to the public under Regulation FD, provided (i) such website is a recognized channel of distribution, (ii) posting of information on a company website disseminates the information in a manner making it available to the securities marketplace in general, and (iii) there has been a reasonable waiting period for investors and the market to react to the posted information.

The debate started by Mr. Hastings has revealed that there are two unofficial “camps” on this issue: one camp believes that CEOs and other public company executive officers should refrain from posting company information on social media to ensure that Regulation FD and other securities rules and regulations are not violated, and the other camp encourages the SEC to take a clear position on which social media postings would be considered Regulation FD compliant given the role that social media is playing in our society today.

It seems that Joseph A. Grundfest, Stanford Law School professor and former SEC commissioner, is in the second camp.  On January 30, 2013, Stanford Law School and The Rock Center for Corporate Governance published his article, Regulation FD in the Age of Facebook and Twitter:  Should the SEC Sue Netflix? This article is in the form of an amicus Wells Submission and suggests that the SEC should proceed by rulemaking to address issues raised by the evolution of social media instead of initiating enforcement proceedings against Netflix and Mr. Hastings.  Professor Grundfest’s article stated that any prosecution on these facts would constitute a “dramatic divergence from precedent” and would violate the SEC’s commitments not to “second guess” good faith attempts to comply with Regulation FD. Professor Grundfest also believes that while the posting was not “inconsistent with the Commission’s 2008 Guidance regarding the implementation of Regulation FD and the use of company websites, that guidance is, in any event, outdated because it fails to account for the evolution of social media.”  

Other interesting arguments outlined in Professor Grundfest’s article include the following:

  • Regulation FD is vulnerable as an unconstitutional restraint on truthful speech, particularly as applied on the facts of this case.
  • The Staff’s Wells Notice has already had a chilling effect on the use of social media without a contemporaneous Form 8-K filing. The Staff has thus obtained much of the remedy it seeks without subjecting its action to SEC review.
  • The proposed enforcement action is a questionable allocation of limited agency resources.
  • The SEC’s regulatory solution should emulate many practices that are now common in the social media rather than challenge information dissemination through the social media.

Generally, I give conservative advice to executives to stay away from the social media posts until the SEC comes out with additional rulemaking on this issue.  But I have to confess that now I am one of Reed Hastings’ 200,000 + followers on Facebook to be able to follow firsthand posts that may lead the SEC to extend permissible broad non-exclusionary forms of distribution of information under Regulation FD to social media.

Social Media and Regulation FD

Given the role that social media is playing in our lives now, would a tweet or a message posted on LinkedIn or Facebook qualify as “public disclosure” under Regulation FD? 

Regulation FD states that dissemination of information through a method (or combination of methods) of disclosure that is “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” would qualify as public disclosure of previously conveyed material nonpublic information regarding the company.

To follow the SEC’s logic described in its 2008 interpretative release regarding the use of company web sites, it seems that company tweets or LinkedIn/Facebook disclosure would qualify as broad and non-exclusionary distribution of information only if: (i) a company’s presence on these social media web sites is viewed as a recognized channel of distribution for information about the company, its business, financial condition and operations, and (ii) disclosure of information through social media tools disseminates the information in a manner making it available to the securities marketplace in general.  It remains to be seen whether social media web sites will become an appropriate FD disclosure vehicle.