Regulation FD and Social Media: The Netflix Facebook Case

Regulation FD applies to social media the same way it applies to company websites. In April 2013 the SEC said a public company can announce material information on Facebook or Twitter, but only if investors have been told in advance which channels the company uses. The SEC reached that view after Netflix CEO Reed Hastings posted a viewing milestone on his personal Facebook page on July 3, 2012.

What did Reed Hastings post, and why did the SEC investigate?

Reed Hastings, then the chief executive of Netflix, posted on his personal Facebook page on July 3, 2012, just before 11:00 a.m. Eastern time, that Netflix monthly viewing had passed one billion hours for the first time. The SEC Division of Enforcement opened an investigation into whether Netflix and Hastings had violated Regulation FD.

Several facts in the SEC report on the Netflix matter shaped the inquiry. Neither Hastings nor Netflix had ever used his personal page to announce company metrics. Netflix had never told shareholders that the page might carry company information. The post was not accompanied by a press release, a post on the Netflix website or company Facebook page, or a Form 8-K.

The SEC also noted that Hastings did not get input from Netflix's chief financial officer before posting. In a normal disclosure process, the finance and investor relations teams decide whether a number is material and how to release it. Here that step did not happen.

What happened to the Netflix stock price after the post?

Netflix shares moved from $70.45 at the time of the Facebook post to $81.72 at the close of the next trading day, according to the SEC's April 2013 announcement. The SEC added that the stock had already begun rising before the post, so the move cannot be pinned on the post alone.

Regulation FD is triggered by selective disclosure of material nonpublic information, so whether the news was material and whether it was selective were the two open questions. Netflix and Hastings argued that the post was not material and that it was not selective, because it reached more than 200,000 Facebook subscribers, a point summarized in a Day Pitney client alert.

What did the SEC conclude in its 2013 report?

The SEC concluded that Regulation FD and its 2008 guidance on company websites apply to social media, and that companies may use those channels if investors know to look there. The commission issued the findings as a report under Section 21(a) of the Securities Exchange Act of 1934 and brought no enforcement action against Hastings or Netflix.

The reason for the restraint was market uncertainty. The SEC said it had not previously addressed how Regulation FD applies to social media, and it treated the Netflix case as the moment to explain its view instead of punishing a company that had acted without clear guidance.

The practical rule that came out of the report is narrow. Posting material news on the personal social media page of an individual officer, without first telling investors that the page is a channel for company news, is unlikely to meet the standard for broad, non-exclusionary distribution. Every case still depends on its own facts, as the SEC stressed.

Why was a personal Facebook page the problem?

A personal Facebook page is a problem because investors have no reason to check it for company news unless the company has told them to. Regulation FD asks whether information reached the public in a way reasonably designed to get it to the market broadly. An audience that happens to include investors is not the same as a channel that investors know to watch.

The Netflix facts show the gap. The news was posted to a personal page, nobody at Netflix had signaled that such pages would carry metrics, and the information was not repeated in a release or filing. Investors gradually learned of it as news outlets and other sources reported it.

The lesson for communications teams is that a large following does not cure the problem. The test is expectation, not reach. A company account that investors have been told to follow can satisfy the standard. A chief executive's personal account that nobody was told about generally cannot.

What should an IR team do before posting material news?

An investor relations team should settle the channel list, the notice to investors, and the review path before any material news goes on social media. The steps below are this article's reading of the Netflix report, not a checklist issued by the SEC.

• Name the company accounts that may carry company news, and tell investors in a press release, a periodic filing or on the investor relations website. The SEC's report centers on this advance notice.

• Decide whether executives' personal accounts are included. If they are not, write that into the social media policy so that a founder's post cannot become the first disclosure.

• Route every post that contains a financial or operating metric through the chief financial officer, legal counsel and the IR lead, the step Hastings skipped.

• Pair first use of any new channel with a press release or Form 8-K, so the information is also on channels investors already watch.

• Keep a dated record of what was posted, where and when, in case the company needs to show how a disclosure reached the public.

A hypothetical shows how the steps work together. A company plans to share a new customer count on its official account on X. Before posting, the team confirms the account was named to investors in its last annual report, the finance chief signs off on the number, and a press release goes out first.

The post then repeats information investors can already find. Companies that handle earnings should connect this process to the rules on earnings release Form 8-K filings, where the furnished versus filed distinction decides how the same numbers are treated.

How does the Netflix case change milestone announcements?

The Netflix case means a milestone metric needs the same disclosure review as a revenue figure when it could move the stock. Hastings described a viewing number, not earnings, and the SEC still treated the post as a Regulation FD question because the number was a business metric that investors followed.

Communications teams often treat user counts, subscriber totals and delivery milestones as marketing material. The report is a reminder that a metric becomes a disclosure issue once investors use it to value the company.

A workable habit is to ask one question before any milestone leaves the building: has this figure appeared in an earnings release, a shareholder letter or a call? If it has, treat the next mention as potentially material and put it through the same review. The Regulation FD guide for investor relations covers who is covered by the rule and what counts as making information public.

Frequently asked questions

Does Regulation FD apply to Twitter and Facebook?

Regulation FD applies to Twitter, Facebook and other social media in the same way it applies to company websites, according to the SEC's April 2, 2013 report. A company can use them to disclose material information as long as investors have been told which channels it will use.

Did the SEC fine Netflix or Reed Hastings?

The SEC did not fine Netflix or Reed Hastings and did not allege wrongdoing. The commission issued a Section 21(a) report instead, because it recognized that the market was uncertain about how Regulation FD applies to social media.

Can a CEO announce company news on a personal account?

A chief executive can announce company news on a personal account only if investors have been told that account will be used for that purpose. Without that notice, the Netflix report indicates the post is unlikely to count as broad public disclosure.

What should a small public company do first?

A small public company should list its official accounts, tell investors about them on its investor relations page, and write a policy that sends every metric through finance and legal review. Smaller issuers face the same Regulation FD rules. The guide to small-cap investor relations programs covers how those companies structure outreach, and the investor relations services page outlines support for public companies.