Social media and federal securities regulation

How often has a Facebook post led to a federal enforcement action? Actually, never. And Netflix CEO Reed Hastings is hoping his isn't the first case. Social media and securities regulation certainly make strange bedfellows and many are watching how the Securities and Exchange Commission will handle this new frontier of enforcement.

In the summer of 2012, Hastings posted to his Facebook account that Netflix subscribers watched over one billion hours of Netflix in June 2012. His profile had over 200,000 followers at the time. Nevertheless, the SEC claims that Hastings violated Regulation Fair Disclosure, or Reg FD, by providing "insider" information to his Facebook friends that was not available to the general public.

Hastings responded to the allegation with a multi-prong defense. He said, "[f]irst, 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."

In brief, Reg FD requires that if a public company gives material information to one investor, it must give it to every investor to achieve the ideal of "full and fair disclosure." Prior to Reg FD's enactment over 10 years ago, public companies usually only released its forecasted data to select analysts. Full disclosure is now required. Many claim Reg FD actually stifles disclosure because instead of sending information out into the world, companies may choose to keep the information to themselves.

Sources close to the SEC's investigation say that the agency is not concerned over the use of social media tools like Facebook and Twitter, but over the public's knowledge of where to access the information. One solution for someone like Netflix's Hastings is to include a link on the company website that leads members of the general public to whatever medium is being used to distribute information.

Compared to previous Reg FD cases, the SEC appears to be overreaching in its claims against Hastings. It will have a hard time showing a Reg FD violation, which requires proof that the information was material and was released privately to a select group instead of all investors. The SEC's argument is weak. While full and fair disclosure is certainly important, it seems the SEC should focus its resources on more blatant violations and more culpable parties.

As Netflix's CEO, Reed Hastings has an elite legal team at his disposal to protect his and his company's interests. If you run a publicly-traded company or own or work for a securities firm, you, too, need expert legal representation. Contact a legal firm that specializes in securities and investment law to help you stay current on changing regulations and keep your business on the right side of the SEC.