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CEOs, Your FB Posts Matter

In the latest instance of social media and the law converging in unexpected ways, Reed Hastings, CEO of Netflix, may have run afoul of the Securities and Exchange Commission?ÇÖs regulations with a Facebook post he made this summer.?á Hastings?ÇÖ post read: ?á?Ç£Netflix monthly viewing exceeded 1 billion hours for the first time ever in June.?Ç¥?á Hastings, who has over 200,000 followers, very well might have intended the post to be a public announcement of the company?ÇÖs success since even the most unsophisticated of users knows that Facebook postings can be potentially made public.

The potential securities concern, however, is not simply where Hastings posted his comment, but that his posting likely did not comply with the SEC?ÇÖs requirements for disclosure of company information.

Hastings?ÇÖ post may have violated 17 C.F.R. ?º?á243.100, better known as Regulation FD (the ?Ç£FD?Ç¥ for Fair Disclosure).?á Regulation FD prohibits an issuer or any person acting on its behalf from making selective disclosure.?á If a public company releases material non-public information to a broker, investment adviser, shareholder or similar person identified in the Regulation, the company must disclose that same information to the public.?á When the disclosure is made ?Ç£intentionally,?Ç¥ as the SEC likely would claim is the case with a Facebook post, the public disclosure must be made ?Ç£simultaneously.?Ç¥?á The rule is an attempt to even the playing field regarding information available to the market and prevent issuers from giving certain analysts or shareholders early access to company information.

As the use of company websites and internet transmission of information exploded, the SEC issued interpretive guidance regarding the means by which an issuer and its spokespersons could release information which would be deemed ?Ç£public.?Ç¥

Traditionally, public disclosure was made through the filing of a Form 8-K with the SEC and issuing a press release through a means designed to provide broad, non-exclusionary distribution of the information.

In August 2008, the SEC provided guidance regarding the use of websites to publish information that would comply with Regulation FD.?á Among other things, the SEC noted that the issuer?ÇÖs website must be a ?Ç£recognized channel of distribution?Ç¥ for company information.?á In considering whether Hastings?ÇÖ post was public dissemination, the SEC likely would note that the company did not list Hastings?ÇÖ Facebook page as a place where material information could be found.?á Moreover, Hastings?ÇÖ announcement could be seen as material because, in the days following the announcement, the stock price rose nearly 20 percent.

Netflix has announced that it received a Wells notice from the SEC staff.?á This indicates that the SEC staff intends to recommend an enforcement action to the Commission, but the ultimate decision whether to file an action is made, following a vote, by the SEC?ÇÖs Commissioners.?á?á If the SEC does pursue enforcement, what may appear to some as a seemingly pedestrian post has already dented Netflix?ÇÖs reputation and, due to legal fees, pocketbook.?á The company?ÇÖs costs may continue to grow.

An important lesson to be taken from this incident is that public companies and its officials must be careful where they post material information and whether it is over a medium where investors know to look for material information.?á For more in-depth coverage of the Netflix fiasco, see this New York Times story.

We also have previously issued guidance on Regulation FD enforcement, including here.

Katherine "Kit" Addleman is a partner in the Dallas, TX office of the law firm of Haynes and Boone, LLP. Her practice focuses on white collar criminal defense. She may be reached at kit.addleman@haynesboone.com or 214.651.5783.
Aaron Taggart focuses his practice on patent and technology disputes, patent monetization, technology transactions, and intellectual property counseling. He provides a deep technical understanding as the basis for his legal advice, and provides information that enables clients to make well-informed business decisions.

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January 2013