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Journal Entry — SEC Clarifies Its Views Regarding Registrants’ Use of Social Media to Communicate Information to Investors

Published on: Apr 04, 2013

On April 2, 2013, the SEC issued a report1 outlining a situation in which Reed Hastings, the CEO of Netflix Inc., announced on his personal Facebook page that Netflix Inc. had streamed 1 billion hours of content in June 2012. The report calls into question whether Netflix Inc. had appropriately complied with Regulation FD and Section 13(a) of the Securities Exchange Act.2

Although the SEC decided not to pursue an enforcement action against Netflix Inc., the report reiterated concerns that registrants and others have expressed regarding the use of social media outlets to communicate corporate matters to investors. The SEC concluded that registrants may engage in such communication provided that it complies with Regulation FD and that issuers “take steps sufficient to alert investors and the market to the channels [they] will use for the dissemination of material, nonpublic information.”

Whether an individual social media communication complies with Regulation FD will depend on its specific facts and circumstances; however, the report outlines a few considerations related to performing this evaluation:

  • The SEC’s 2008 interpretive guidance3 on the use of company Web sites. The SEC believes that the interpretive guidance applies to social media outlets because they “are not fundamentally different from the ways . . . web sites, blogs, and [‘push’ technologies such as] RSS feeds . . . are used.”
  • The interpretive guidance was not intended to be prescriptive but was “designed to be flexible and adaptive . . . with a factor-based framework for analysis, rather than static rules applicable only to web sites.”
  • A fundamental point of the interpretive guidance is to understand whether a Web site is a recognized channel of information distribution that depends on how a registrant has alerted the market and its investors (including its disclosure practices) and how the market and investors use the registrant’s Web site. It is important to understand whether the registrant “has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company.”
  • The report reiterates that Regulation FD is clearly applicable whenever nonpublic information is disclosed to any group that includes one or more persons listed in Regulation FD. Further, the report notes that if a registrant were to elect not to file a Form 8-K, it would need to consider “whether the information was being disseminated in a manner ‘reasonably designed to provide broad, non-exclusionary distribution of the information to the public.’”
  • The report indicates that a registrant employee’s personal social media site is not typically assumed to be a channel for a registrant to communicate material corporate information and that, without appropriate notice to the market and investors of the registrant’s intent to use such a site, investors would not have the opportunity to gain timely access to the information.

 


1 SEC Release No. 69279, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings.

2 Regulation FD and Section 13(a) of the Securities Exchange Act “prohibit public companies, or persons acting on their behalf, from selectively disclosing material, nonpublic information to certain securities professionals, or shareholders where it is reasonably foreseeable that they will trade on that information, before [such information] is made available to the general public.”

3 SEC Release No. 34-58288, Commission Guidance on the Use of Company Web Sites.

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