Regulation Fair Disclosure (Regulation FD) was adopted by the Securities and Exchange Commission (SEC) in 2000 to combat the growing practice of disclosing material non-public information to select investors and other interested individuals before disclosing the same material information to the general public. Thus, certain investors (often institutional investors) had an unfair advantage in buying and selling stocks. Regulation FD states that when an issuer discloses material non-public information to anyone, where it is reasonably foreseeable the individual or entity will trade based on the disclosed information, the issuer is required to disseminate that information to the public. When material non-public information is disclosed unintentionally, then disclosure to the public must be made promptly. When material non-public information is disclosed intentionally, then disclosure to the public must be simultaneous.
In 2008 the SEC issued “Commission Guidance on the use of Company Web Sites” (2008 Guidance) to outline a uniform rule for the expanding use of web sites to disseminate material non-public information. According to the 2008 Guidance, the SEC permits the use of company web sites to disseminate material non-public information to the public if the web site is a recognized channel of distribution. Determining whether a web site is a recognized channel of distribution is based a number of factors including if and how a company has informed the market and investors of its plan to use the web site to disseminate material non-public information, and how the market and investors use the web site. The most important factor to consider in determining whether a web site is a recognized channel of distribution is “whether the company made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information.”
On July 3, 2012, Reed Hastings, the CEO of Netflix, used his personal Facebook page to disclose that Netflix streamed 1 billion hours of content in the month of June. This information was non-public. Shareholders of Netflix and the market were not notified that Netflix may use Hastings’s Facebook page as a channel of distribution for material non-public information, and Hastings and Netflix never used Hastings’s personal Facebook page to disseminate material non-public information in the past. The SEC investigated Hastings’s Facebook post but did not take action against Netflix. The SEC issued a Report outlining its investigation dated April 2, 2013.
In the April 2013 report, the SEC stated that communication by issuers through social media requires the same case-by-case Regulation FD analysis as other issuer communications. The SEC also reported that the 2008 Guidance applies to disclosures made through social media. The report emphasizes the importance of notifying the market and investors of the social media channels a company intends to use to disseminate material non-public information and what type of information will be disseminated through the specified channels. Since new web sites and social media networks are created daily, the SEC is concerned that the use of social media channels, without proper notification to shareholders and the market, will force shareholders and other individuals to follow all social networking channels which is unrealistic and essentially impossible. The requirement that issuers provide notification of the social networking channels it intends to use to disseminate information is not a limitation on companies; companies are free to use as many social networking sites as desired, but they must disclose each site to shareholders and the market ahead of time. The report suggests using periodic reports, press releases, and company web sites to notify stockholders and the market of the social media channels the company plans to use to disseminate information, but that is a non-exhaustive list.
The report further establishes that the method of disclosure used by Netflix, where material non-public information was disclosed on the personal social media site of the CEO without previous notification to stockholders or the market that such site would be used to disseminate information, will likely never be considered “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” as is required by Regulation FD. However, the report indicates that if proper notice was given to Netflix investors and the market that Hastings’s personal Facebook page would be used to disseminate material non-public information, such site could qualify as a recognized channel of distribution.
In response to the SEC’s April 2013 report regarding the use of social media to disseminate material non-public information, Netflix included a statement in its April 2, 2013 8-K filing explaining how Netflix uses social media to disseminate information. The statement encourages investors, the media, and anyone else interested in Netflix to review information Netflix posts on The Netflix Blog, The Netflix Tech Blog, The Netflix Facebook Page, The Netflix Twitter Feed, and Reed Hastings’s Public Facebook Page. The filing includes links to each of the social media channels listed above as well as a notice that the social media channels listed are subject to change.
Sources:
Sec. & Exch. Comm’n., Selective Disclosure and Insider Trading (2000).
17 C.F.R. § 243.100 (2000).
Sec. & Exch. Comm’n., Commission Guidance on the use of Company Web Sites (2008).
Sec. & Exch. Comm’n., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934; Netflix, Inc., and Reed Hastings (2013).
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