The SEC, Social Media and Netflix

Public companies are mandated by the Securities and Exchange Commission in the US to disclose important (“material”) news, developments and information pertinent to their health, prospects and performance.

But it is not enough to simply disclose that type of information. They must do so via media that all investors in these companies can access easily. Insider trading, for example, stems from a gross  violation of that mandate where a handful have access to information that others don’t.

Last year though, when Reed Hastings, Netflix’s CEO, broke some news on Facebook, the SEC considered prosecuting him. Today, it said it wouldn’t, and clarified the rules on social media news disclosures. 

The SEC’s report of investigation stems from an inquiry the Division of Enforcement launched into a post by Netflix CEO Reed Hastings on his personal Facebook page stating that Netflix’s monthly online viewing had exceeded one billion hours for the first time (emphasis, mine).

Netflix did not report this information to investors through a press release or Form 8-K filing, and a subsequent company press release later that day did not include this information. Neither Hastings nor Netflix had previously used his Facebook page to announce company metrics, and they had never before taken steps to alert investors that Hastings’ personal Facebook page might be used as a medium for communicating information about Netflix.

This mattered, because

Netflix’s stock price had begun rising before the posting, and increased from $70.45 at the time of the Facebook post to $81.72 at the close of the following trading day.

[I am not too clear why the SEC would mention that the stock price had begun to rise before the posting, unless the market suspected something or if some other unrelated piece of news was out, or a general rising market tide was already helping all stocks.]

To its’ credit, the SEC is moving with the times, and had this to say:

The Securities and Exchange Commission today issued a report that makes clear that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.

End of story?

Not so fast, says Dan Primack at Fortune, who spoils the party with these comments:

Yes, Netflix now would need to tell investors about Hastings’ personal Facebook account (assuming he still plans to use it for company disclosure purposes). But it also could just post a list of two dozen social media tools, and hope that investors happen to be checking the right one at the right time. Or that investors have created personalized alerts for all of them (likely requiring that they first create accounts).

Hard to disagree with him, isn’t it?

Also, will the SEC have to issue additional clarifications in the future when some other company discloses some other material fact on an obscure social media channel – and then cite this ruling as an excuse for not disseminating whatever they disclosed, more widely?

I doubt if “serious” publicly traded companies would indulge in such egregious behavior, but I do think that additional clarifications are needed, especially in the face of an ever increasing number of social media channels.

One Response to “The SEC, Social Media and Netflix”

  1. Another perspective from Wired Business on how this may be a good way for corporate spinmasters (not sure if I agree…but it’s an interesting article):

    http://www.wired.com/business/2013/04/sec-netflix-corporate-spin/

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