On Thursday, Netflix (NASDAQ:NFLX) announced that the staff of the U.S. Securities & Exchange Commission had issued "Wells Notices" informing the company and its CEO, Reed Hastings, that it intended to ask the SEC Commissioners for approval of a civil enforcement action against Netflix and Hastings. The issue is whether the company violated the SEC's Regulation FD last July, when Hastings announced on his Facebook page that Netflix had streamed a billion hours of videos in June.
Regulation FD, for "Fair Disclosure," requires that companies disclose material information to all shareholders at the same time, rather than giving selective access to a favored few. The regulation was implemented in 2000, after a spirited campaign by many investors, including The Motley Fool.
In a chippy announcement, filed on Form 8-K as well as posted to his Facebook page, Hastings asserted that his July post to his Facebook page, which had over 200,000 subscribers, was a public communication. Two hundred thousand is, after all, quite a large number, and among those subscribers were undoubtedly reporters, bloggers, and analysts who spread the information further. Hastings also asserted that the information wasn't material, anyway, because Netflix had previously announced that its members were viewing "nearly 1 billion hours per month."
Is material "material?"
Whether the horrifying news that Netflix subscribers had watched a billion hours of How I Met Your Mother in June is "material" is important to the case, but not really new or interesting -- the SEC and courts have had to determine materiality since the enactment of the Securities Act of 1933, and they generally do so broadly. The U.S. Supreme Court has said that a fact is "material" if there is a substantial likelihood that its disclosure "would have been viewed by a reasonable investor as having significantly altered the 'total mix' of information made available" (link opens PDF file). By that standard, it may be hard to get incredibly excited about the fact that Netflix's odometer had turned over, but Hastings will have to address the question: If it wasn't relevant, why did you feel compelled to announce it?
Is public "public"?
Hastings' first argument, that his Facebook disclosure was functionally equivalent to disclosure in a public securities filing or press release, has spurred some scholars to suggest that the SEC needs to update its disclosure rules to account for social media such as Facebook, LinkedIn, or even The Motley Fool's Blog Network. The SEC staff's interpretation seems less about the platform than about its reach, though. While Facebook posts are certainly "public," as parents have to stress to their teenagers again and again, it's not obvious that a post "is reasonably designed to provide broad, non-exclusionary distribution of the information to the public," as Reg FD requires. The advantage of disclosure on Form 8-K, or in a press release, or even on a company's own website, is that those go through channels that investors understand and have come to expect to use for receipt of material information. At some point, the spread of information through social media, along with the omniscience of Google, may mean that disclosure on Facebook, with its billion-person audience, is equivalent to a press release, but the SEC is signaling that now may not yet be that time. In the meantime, by filing his latest Facebook post with the SEC, Reed Hastings is showing his fellow CEOs an easy, although perhaps ironic, way to avoid selective disclosure while using social media.
Nobody wants to face an SEC civil enforcement action, but it seems unlikely that Netflix and Hastings are in big trouble -- they're not going to jail, and any fine would be manageable. Nevertheless, until the SEC or the courts say otherwise, for better or worse, CEOs will need to give more thought before posting company information on Facebook than college students do before posting photographs of their drunken Spring Break revels.