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Netflix and its CEO Reed Hastings received a Wells notice from the SEC on December 5 relating to a social media post that Mr. Hastings made on his Facebook page back in July. A “Wells notice” is a letter that the SEC issues to individuals or companies to warn them that the SEC intends to bring an enforcement action against them. In this case, the SEC staff has informed Netflix that they are recommending that the SEC bring a civil action against Netflix for a Facebook post by Mr. Hastings related to Netflix members reaching one billion hours a month in video streaming. The SEC is asserting that Netflix violated Regulation FD (Fair Disclosure) as a result of this posting.
Regulation FD was adopted to address the selective disclosure of information by publicly traded companies and other issuers. Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities—generally, securities market professionals, such as stock analysts, or holders of the issuer’s securities who may trade on the basis of the information—the issuer must make public disclosure of that information. In other words, the rule was intended to ensure that individual investors have the same access to material information as large institutional investors by prohibiting selective disclosure of material information.
The SEC staff is apparently taking the position that Netflix provided Mr. Hastings’ Facebook “Friends” with material information in his posting and that Netflix should have released the information regarding the billion hours of streaming with a Form 8-K filing or press release.
Mr. Hastings issued a statement yesterday that included the following comments:
In early July, I publicly posted on Facebook to the over 200,000 of you who subscribe to me that our members had enjoyed over 1 billion hours in June, highlighting how strong our content was. There was press coverage as there are many reporters and bloggers among you, my public followers. Some of you re-posted my post. Again, we did not also issue a press release or file an 8-K about this. . . . .
I want to note a few things.
First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers.
Second, while we think my public Facebook post is public, we don’t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings. We think the fact of 1 billion hours of viewing in June was not “material” to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month.
OUR TAKE: Without passing on the merits of whether the information posted by Mr. Hastings on Facebook was material or not, if the stated intent of Regulation FD is to “level the playing field” by requiring issuers to provide “full and fair disclosure” on a “broad and non-exclusionary” basis, what better way to accomplish that goal than by allowing companies to use popular social media as a means for disseminating material information. Social media has become an exceptionally popular and publicly available venue for communication of all kinds – and it is clearly more dynamic and interactive than a company website. SEC rulemaking on the methods of fair disclosure needs to evolve to take into account the enormous growth of social media as a means of daily communication. To provide some perspective, Regulation FD was adopted in 2000. Facebook was launched in 2004 and has reached over 1 billion active users this year. Hopefully, the SEC will take this Netflix issue as an opportunity to clarify its rules on public disclosure and expand the means through which an issuer can make public disclosure to include popular social media.
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