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The SEC Netflix Report: Social Media May Qualify as a “Recognized Channel of Distribution”

April 3, 2013

 

The SEC announced in a Report of Investigation (the “Netflix Report”) issued on April 2, 2013 that it will not pursue an enforcement action against Netflix, Inc. or its CEO (Reed Hasting). It did so after investigating whether Mr. Hasting’s use of his personal Facebook account on July 3, 2012 to announce that Netflix’s monthly viewing “exceeded 1 billion hours for the first time in June” violated Regulation FD.

The SEC issued the Netflix Report to provide guidance to public companies about Regulation FD and the use of social media. The report clarifies that a social media networking site may qualify as a “recognized channel of distribution” under Regulation FD and be used to communicate material, non-public information provided appropriate steps are first taken, including alerting the market about the forms of communication used and the types of information that may be disclosed on such sites.

Regulation FD and Prior SEC Guidance

Regulation FD, adopted by the SEC in 2000, prohibits public companies, or persons acting on their behalf, from disclosing material non-public information to certain securities professionals or to shareholders who might trade on the basis of the information if the information is not available publicly. Regulation FD is designed to prevent selective disclosure of material non-public information to a “privileged few” and to provide individual investors with equal access to company information.

Information is considered public for purposes of Regulation FD if it has been disseminated through a recognized channel of distribution that results in broad, non-exclusionary distribution to the public. Since 2000, broadly-disseminated press releases and Form 8-K filings have become the accepted default channels for distributing material information to the public. But in August 2008, in recognition of the growing reliance by companies, investors and other market participants on the Internet, the SEC issued an interpretive release concerning the public nature of information disclosed on company websites for purposes of Regulation FD (the “2008 Guidance”).

The 2008 Guidance was limited to website disclosures and did not expressly address whether information disclosed through Twitter, Facebook or other social media outlets could constitute public disclosure under Regulation FD. It did, however, provide a useful framework to assess the public nature of social media disclosures and the SEC used this framework in the Netflix Report.

The 2008 Guidance contained a list of non-exclusive factors for evaluating whether information disclosed on a company’s website could be considered disseminated through a recognized channel of distribution for purposes of Regulation FD. These non-exclusive factors include:

  • Whether and how a company has informed investors and the markets that it will post important information on its website;
  • Whether the company has a pattern or practice of posting important information on its website;
  • Whether the website efficiently leads investors and the markets to information about the company, including information specific to investors, and whether the information is prominently disclosed in a consistent location and in a format that is readily accessible to the general public;
  • The extent to which information posted on the website is routinely picked up by the market and readily available to, and reported by, the media;
  • Steps the company has taken to make information posted on its website accessible or to alert the market of its availability;
  • Whether the website is kept current and accurate;
  • Whether the company uses other methods to distribute important information and the extent to which those other methods are the predominant method used by the company to disseminate information; and
  • The nature of the information.

The Netflix No Enforcement Decision

The Netflix Report does not elaborate explicitly on the basis for the decision by the SEC’s Division of Enforcement not to pursue an action against Netflix or Mr. Hastings, although it appears the Division of Enforcement considered both the potential materiality of the disclosure as well as whether the disclosure had been broadly disseminated to the public. On this latter point, the Netflix Report describes the period of time it took for the media and research analysts to pick up and further disseminate the information as well as the number of subscribers (200,000) that received Mr. Hastings post. The report also notes that neither Mr. Hastings nor Netflix had, as suggested by the non-exclusive factors included in the 2008 Guidance, previously used Mr. Hastings’ Facebook page to announce company information or informed investors that Mr. Hastings’ Facebook page would be used to disclose material non-public information about Netflix.

The Netflix Report identifies two specific questions the SEC considered:

(i) the application of Regulation FD to Mr. Hasting’s Facebook post; and
(ii) the application of the SEC’s 2008 Guidance to emerging technologies, including social networking sites, such as Facebook.

The Report relies heavily on the 2008 Guidance to provide new and useful guidance on the use of social media in addressing these questions.

SEC Guidance on the Use of Social Media

A.     Regulation FD Applicable to Social Media Disclosures

The Netflix Report clarifies that company communications through social media outlets are subject to Regulation FD and that the principles outlined in the 2008 Guidance apply equally to corporate disclosures made through social media channels.

This means that all disclosures by or on behalf of a public company through a social media channel must be evaluated under Regulation FD if the disclosures are made to anyone who may be one of the enumerated persons in Regulation FD (i.e., one of the specified securities professionals or a shareholder who might trade on the basis of the disclosed information). Not only does this require an assessment of whether the disclosed information includes material non-public information, but it also requires consideration of whether the information is being disseminated in a manner reasonably designed to provide broad, non-exclusionary distribution of the information to the public.

Perhaps long overdue, the Netflix Report acknowledges that today’s evolving social media channels are an extension of “push” technologies that the SEC specifically recognized in the 2008 Guidance. The report encourages public companies to rigorously consider whether any particular social media channel being used is a recognized channel of distribution. In doing so, the Netflix Report expressly makes it clear that public companies who want to use a social media channel such as Facebook or Twitter and not face challenges to whether that media, on its own, satisfies Regulation FD, need to first take appropriate steps including:

  • Alerting the market about the forms of social media or other communication channels the company will use to disclose material non-public information; and
  • Alerting the market about the type of information the company intends to disclose through these identified communication channels.

As suggested in the Netflix Report and consistent with the 2008 Guidance, such disclosures could be included in a company’s periodic reports and press releases together with the company’s corporate website address. The company’s corporate website could also identify the social media channels intended to be used by the company and give investors and other market participants the opportunity to subscribe, join or register with the identified social media site to receive company disclosures.
The Netflix Report also makes clear that companies should also consider other factors specified in the 2008 Guidance in determining whether information disseminated through a social media channel is provided on a broad, non-exclusionary basis to the public. In particular, while not explicitly addressed by the Netflix Report, unless a company can reasonably demonstrate that the information it discloses on Twitter, Facebook or other social media site is readily accessible to a broad investor audience — whether as a result of the number of investors and other market participants who regularly follow the company on Twitter or subscribe to its Facebook page or as a result of the media quickly picking up and separately reporting the information — disclosure through a social media channel may not be viewed as providing broad, non-exclusionary distribution of information to the public.

B.     Disclosures by Corporate Officers

The Netflix Report, while reporting that no enforcement action would be taken, cautions that the use of a corporate officer’s personal social media site, without advance notice that the site may be used for this purpose, is “unlikely to qualify” as a method reasonably designed to provide the broad, non-exclusionary distribution of information to the public that is required by Regulation FD.

Even if an officer’s social media posts are widely followed, the Netflix Report makes clear that investors must first be made aware that the officer intends to disclose information on behalf of the company using his or her Twitter, Facebook or other social media channel. Without this advance notice, an investor would not have adequate reason to know that important company information could be disclosed in this manner or an opportunity to subscribe or take other action to receive the information when disclosed.

We anticipate that many companies may begin to use their corporate websites and corporate social media accounts as tools for communicating material non-public information but will continue to be cautious about posts to personal social media accounts that are not preceded by distribution of the material non-public information in a manner that more clearly complies with Regulation FD. To avoid social media postings by company officers that could run afoul of Regulation FD, companies should take steps to educate their insiders about the risks of social media use.

Final Thoughts

The SEC’s express acknowledgement in the Netflix Report that the use of social media, with appropriate steps and application of the principles outlined in the 2008 Guidance, can comfortably satisfy Regulation FD is welcome news, and should provide a useful framework to enable companies to broaden the manner in which they communicate to investors. By expressly supporting the efforts of companies to seek new ways “to communicate and engage with shareholders and the market,” the guidance also provides a sound basis for companies to evaluate new forms of shareholder communications going forward.

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This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Martin Dunn, an O'Melveny partner licensed to practice law in the District of Columbia and Maryland, J. Jay Herron, an O’Melveny partner licensed to practice law in California, and Shelly Heyduk, an O'Melveny counsel licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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