As we reported in the Gibbons E-Discovery Law Alert in May 2012, “Reg FD” could present a potential pitfall for those that post material non-public information via social media platforms. In early December 2012, that “pitfall” became a reality for Netflix Inc. CEO Reed Hastings. In July 2012 Hastings published on his public Facebook page a 43-word post concerning viewership statistics, including that Netflix subscribers had watched one billion hours of video the previous month.
The post presents at least two questions. First, whether Hastings’s statement constitutes “material” information falling within the purview of Reg FD. As a reminder, Reg FD mandates that, when an issuer, or a person acting on behalf of the issuer, discloses material non-public information to certain enumerated persons (generally, securities market professionals and security holders who may trade on the basis of the information), it must make public disclosure of that information simultaneously (for intentional disclosures), or promptly (for non-intentional disclosures).
The second — and far more novel — issue is whether posting to over 200,000 people constitutes a “public” disclosure. The SEC staff does not seem to think so. On December 6, 2012, Hastings disclosed in an SEC filing that Netflix had received a “Wells notice” from the SEC staff, recommending that the agency bring an enforcement action against Netflix over the July post. Specifically, the SEC is concerned that Hastings’s post violated Reg FD in that a post on Facebook is not a disclosure to all investors at the same time. The Wells notice does not mean the SEC will actually prosecute Netflix. Moreover, such a prosecution would likely face serious challenges because a lynchpin is proving that a public posting on Facebook is not public dissemination. That said, a company like Netflix that has struggled to maintain relevancy in an increasingly digital age nonetheless felt the sting of a decreasing stock price in the wake of the announcement of the Wells notice.
While regulators and public companies find their footing in applying a 12 year old rule to new technologies, it is still a good idea to: (i) ensure that their message is being simultaneously delivered to a wider audience instead of to a fraction of subscribers to a particular social media platform; and (ii) have documented policies and procedures concerning the use of social media. Otherwise, a public company may find itself under unwanted public scrutiny with undesirable consequences regardless of culpability.