A possible suggestion for Reed Hasting's Netflix queue: “Look Who's Talking.” Or maybe, “SEC and the City?”
Calling it a “fascinating social media story,” the Netflix CEO has announced that his company received a Wells notice from the Securities and Exchange Commission over a possible Regulation Fair Disclosure (Reg FD) violation. In sharing that news – and apologies if this makes your brain hurt – he disclosed a possibly improper disclosure on Facebook, on Facebook.
Reg FD was added to the books in 2000 to ensure that companies weren't picking and choosing insiders and favored analysts to communicate potentially market-moving news. In theory, it is meant to ensure that all investors get full and relevant information, usually through a widely disseminated press release, rather than having it disclosed piecemeal or to a select group. A Wells Notice is a notification that charges have been recommended, giving a company or individuals the chance to defend themselves and persuade a regulatory accuser into dropping their case.
“In July, I publicly posted on Facebook, to the over 200,000 of you who subscribe to me, that our members had enjoyed over 1 billion hours in June, highlighting how strong our content was,” Hastings wrote on Thursday. “We did not issue a press release or file an 8-K about this.”
In that scrutinized post, he praised the efforts of his content licensing team, adding, “When ‘House of Cards' and ‘Arrested Development' debut, we'll blow these records away. “
On Dec. 5, a Netflix 8-K filing reported that the company and 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... for violations of Regulation Fair Disclosure.”
"The SEC staff believes that I gave you all ‘material' investor information in my post and that we needed to instead release the June viewing fact ‘publicly' with an 8-K filing or press release,” Hastings wrote.
Among his objections:
- “We think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers.”
- “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.”
- “While our stock rose the day of my public post, the increase started well before my mid-morning post was out, likely driven by [a] positive Citigroup research report the evening before. “
“We remain optimistic this can be cleared up quickly through the SEC's review process,” Hastings wrote.
When we first wrote of Hastings' targeted Facebook post in July, we raised key questions. How many Facebook friends are needed to pass the threshold to be considered as a “recognized channel” and are a CEO's followers a select subset of investors that could be considered insiders? Even if the statement was made on the company's own Facebook page, would that information channel satisfy regulators the same way a traditional, widely circulated press release would have?
The Wells Notice indicates that the SEC was asking some of these same questions. Even if its case is ultimately dropped, it may help shed some overdue light on a rule that gets increasingly murky in the ever-changing age of social media.