Don't Blame The SEC, Netflix CEO's Facebook Post Is Questionable

Social media and securities regulations don’t mix very well but in the latest incident involving Netflix CEO’s Facebook post the SEC may have it right. 
This summer Netflix CEO Reed Hastings posted a public update on his Facebook page. In it he mentioned that members watched over 1 billion hours of Netflix in June. The SEC thinks Hastings broke disclosure rules (Reg FD) that say companies must make material information available to all investors simultaneously via SEC filing or press release.

As a result, Netflix was hit with a Wells Notice which means it could face action from the SEC.

The rule, Regulation Fair Disclosure, was adopted in 2000 to address a leg-up some institutional investors were getting via information about public companies that was not available to all investors. For instance, the material information would come via conference calls or during meetings that were closed to smaller investors.

Hastings was flagged by the SEC for sharing what the regulator thought was material information that was not available to everyone.

But a public Facebook update is anything but private. That’s why the initial reaction from many,myself included, was that the SEC is out of touch with the role of social media in the financial industry and thus the entities it regulates. That while corporate CEOs, traders, brokers and companies immerse themselves in social media the SEC is sticking its head in the sand.

On second look though the SEC seems to have a valid argument regarding the Hastings Facebook post.

Here’s why: It’s not the medium that Hastings chose (his Facebook page) that the regulator has a problem with, but rather that investors have not been told to seek out this particular medium for important information about the company.

In browsing the Netflix investor relations page you’d be hard pressed to find a link to Hastings’ Facebook page–which he uses to communicate informally information about the company.

The SEC declined to comment and Netflix has not responded to a message left today.

Sources familiar with the regulator’s position say it’s not Facebook or Twitter as a medium of communication that the SEC is taking issue with. It’s that companies need to make sure they’re telling investors where to find important information–a link on the investor relations page to the CEO’s social media accounts, for instance, would help.

But it gets a little more complicated because in his response to the Wells Notice Hastings says the Facebook post at issue (where he said members were enjoying “nearly a billion hours per month” of Netflix) did not include material information. He writes:

First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers.

Second, while we think my public Facebook post is public, we don’t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings. We think the fact of 1 billion hours of viewing in June was not “material” to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month.

That’s got to be raising eyebrows at the SEC which is surely looking at the spike in Netflix shares that occurred the same day as Hastings’ post. Shares were up 5% that day. However, there was also a Citigroup report that came out the the previous evening from analyst Mark Mahaney standing by his Buy rating and $130 price target on the stock.

Hastings argues the rally “started well before my mid-morning post was out, likely driven by the positive Citigroup research report the evening before.”

Whether or not the information was material will be a sticking point in this case but the larger lesson for public companies and executives with social media accounts is this: Make sure your investors can easily find your social media accounts especially if your CEO is updating followers and friends about the company. It’s as simple as mentioning and linking the websites from your investor relations pages.

There’s a good example of that working out in a company’s favor.  It’s the case of Alan Meckler, CEO of WebMediaBrand, a web company with a market cap of roughly $10 million.

Meckler’s Twitter account might send chills down a corporate lawyer’s spine. He tweets about everything from quarterly forecasts to upcoming acquisition announcements.

The SEC noticed and asked him in a letter to explain how his Twitter updates complied with Reg FD. IR Web Report covered the story and noted Meckler’s attorney’s response. Don Reynolds argued that the tweets do not include material information (Hastings argued the same) but then he adds that despite the absence of material information the tweets could very well meet Reg FD standards:

…the tweets could be seen as meeting the two main requirements of the SEC’s guidance: 1)  that [Twitter] is a recognized channel of distribution; and 2) postings on the site disseminate the information in a manner making it available to the securities marketplace in general.

Relevant to the Hastings case is Reynolds’ argument that his client’s Twitter account is “clearly displayed and readily accessible and readable on WMB’s public website.” In other words, WebMediaBrand’s investors are very much aware of the Twitter account because the company’s website directs them to Meckler’s social media account–prominently at the top of the homepage.

The SEC then replied saying it had no further comment on the matter. A social media victory for one public company.

Reynolds could not talk about the particular case but offered this perspective on the overall issue, “Obviously something on the internet is publicly accessible but do people actually know where to find it and how to get there? That’s the issue the SEC is most concerned with here.”

source: forbes.com

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