Yesterday, Netflix filed an unusual Form 8-K with the SEC that it called a "Regulation FD Disclosure." The filing states that on December 5, 2012, Netflix and its CEO, Reed Hastings, each received a Wells Notice from the staff of the SEC "indicating its intent to recommend to the SEC that it institute a cease and desist proceeding and/or bring a civil injunctive action against Netflix and Mr. Hastings for violations of Regulation Fair Disclosure, Section 13(a) of the Securities Exchange Act and Rules 13a-11 and 13a-15 thereunder."

In an exhibit to the filing, the company provided a copy of a statement that was also made by Hastings to subscribers on his publicly available Facebook page. In it, Hastings says that in June, the company posted on its blog that Netflix members were enjoying “nearly a billion hours per month” of Netflix. In early July, Hastings publicly posted on his Facebook page that Netflix members had enjoyed over 1 billion hours in June. Hastings Facebook page has over 200,000 "subscribers." The company did not issue a press release or file an 8-K about either the "billion hours" either at the time of the blog post or the Facebook post.

Hastings writes that on December 5, the SEC staff informed him that that they are recommending that the SEC bring a civil action against him and Netflix because they believe his July "billion hour" post violated Regulation FD. In short, the SEC staff contends that post represented material information that had to be accompanied with an 8-K filing or press release.   

Hastings stated that he hoped the matter could be cleared up through the Wells process, but highlighted a few key points:

  • With 200,000 subscribers, including many reporters and bloggers, Hastings' Facebook account was itself "very public."
  • Netflix did not consider the fact of 1 billion hours of viewing in June to be “material” to investors, and that information had already been discussed in the Netflix blog a few weeks before.
  • Although Netflix stock did rise on the day of the Facebook post, the increase started well before the Facebook post came out, and was likely driven by a positive Citigroup research report the evening before. 

Under Regulation FD, issuers that disclose any material nonpublic information regarding the company or its securities must make a prompt public disclosure of that same information by filing a Form 8-K or through "any other non-exclusionary method” that provides broad public access, such as a press release. One question raised by the Hastings/Netflix scenario is whether a post that goes out to 200,000 subscribers to one's Facebook page is really any different than issuing a press release that might not even reach that many people. Of course, the SEC could argue that investors and financial reporters who are trying to follow Netflix developments would logically be watching for press releases, and not necessarily tracking the CEO's Facebook page.

Another issue could be whether a Facebook page -- which even if public requires its reader to have a Facebook account -- is "non-exclusionary."