Being a pioneer is tough and risky. It takes courage, skill and more than a little luck. And for every Lewis and Clark there are dozens who meet less glorious ends. That’s the lesson for Netflix, whose attempt to be a pioneer in the use of social media has run afoul of the Securities and Exchange Commission.
It seemed innocent enough. Netflix CEO Reed Hastings popped out a short, 43-word message on his Facebook page, cheering subscriber demand for new video releases.
But this statement could be a violation of the SEC’s rule on fair disclosure, affectionately known as Reg FD, which requires a public company to disclose material information to all its investors at the same time.
A company accomplishes this by making a public filing with the SEC and, in some cases, issuing a press release. But the rise of social media is challenging that practice and may cause the SEC to re-examine the rule, which was adopted twelve years ago in the pre-social-media age.
To be fair, Hastings’s post looks like a casual act rather than well-conceived plan to pioneer a new approach to financial disclosure. And there’s some question about whether the information he shared was material. Nonetheless, the SEC inquiry seems likely to set the standard for the use of social media for disclosure.
It’s easy to see why company statements over social media make the SEC wary and give compliance officers headaches.
For one thing, it’s incredibly easy to post to these platforms. With a few quick keystrokes the CEO has reached thousands of followers, who in turn share with many thousands more, all in a matter of seconds. That’s a big change from the way CEO statements have normally reached the investing public.
Usually, there several checks on what the CEO says. The CFO, the lawyers and a PR expert all mediate the process to make sure the message is clear, and if material information is to be disclosed they take steps to make an SEC filing.
Things don’t always follow this neat process, of course. An off-the-cuff remark by the CEO at a public event can be picked up by a newswire, for instance. But even in such cases, there is a little time before the news item appears – time that can be used to prepare a formal statement to clarify or expand the CEO’s remark. A newswire also has a process for pursuing clarifications or corrections, if needed- a safeguard that doesn’t exist with social media.
Although Facebook and Twitter have grown explosively and increasingly are used by investors, they are likely to be regarded by the SEC as inadequate for purposes of satisfying a company’s disclosure obligations. This is even more likely to be the case if the SEC takes the view that an individual investor might not have access to new media and therefore would be disadvantaged if companies were allowed to rely on it to release important information.
This episode is also a reminder that if you’re going to be a pioneer, you should first be credible, and unfortunately Netflix has a bit of a credibility problem. These were the guys, after all, who thought it was a good idea to separate their DVD and video-steaming businesses. The market promptly cut the shares by a third before the company reversed course.
Social media has often been compared to the Wild West. And like that era, when it comes to using social media for meeting public-disclosure requirements it might be preferable to be a settler than a pioneer.