Netflix and its CEO Reed Hastings have received a Wells notice and thus may face a U.S. Securities and Exchange Commission civil claim over a July Facebook post from Hastings saying that Netflix viewing “exceeded 1 billion hours” of videos in June. The post was widely reported, reblogged and tweeted and the company’s shares rose 6.2 percent that day, the stock’s biggest gain in almost six weeks.
The SEC’s Regulation FD, adopted in 2000, requires public companies to make full and fair public disclosure of material non-public information.
The company and Hastings claim that there is not violation because the Facebook post was not “material” information. Hastings also asserts that a “posting to over 200,000 people is very public, especially because many of my [Facebook] subscribers are reporters and bloggers.”
“The evolution of social media presents the SEC with some very interesting regulatory challenges. But if they’re worried about social media, there are ways for them to address that without threatening to sue Reed Hastings. They should have a rulemaking where they can ventilate these issues,” said Joseph Grundfest, former SEC commissioner and Stanford Law School professor. “This situation has nothing to do with the problems that Regulation FD was designed to address.”
It shouldn’t be a surprise that and when regulatory authorities are behind the times and forced to play “catch-up.”
Since the internet has made it so much easier for any interested party to obtain information and since social media in the business world has become ubiquitous, more traditional methods of issuing news such as press release services are much less valuable and may even become obsolete (except perhaps as a mechanism to avoid this sort of regulatory violation). For example, after a prominent fight, the SEC now allows companies to disclose information such as earnings solely on their websites so long as they met certain criteria.
The Netflix alternative defense — that the information is not material — seems silly to me given the jump in the stock based on that “news.” That said, since the stock tanked once earnings were announced, those who bought on the post should probably not have taken the “news” so seriously. There’s a lesson in that too.
On the other hand, while the Facebook posting was sloppy (I highly doubt that company lawyers were involved), the post seems plenty “public” to me, especially given the extent of coverage it received via both traditional and social media. Netflix should perhaps have issued a joint press release and perhaps even a regulatory filing in the interest of extreme caution due to the lack of clear rules in this area — that’s the careful lawyer’s answer — but the SEC has got to recognize that social media has changed the game.
There is simply no reason to think that a press release and a regulatory filing would have provided more and better information to the public than the Facebook post.
Addendum: Brad Loncar has an excellent take on why the SEC’s action is bad policy here.