SEC Probe of Netflix Highlights Legal Risks of Social Media
Friday, December 28, 2012

The U.S. regulatory probe of a Facebook posting by Netflix CEO Reed Hastings is raising questions about whether the 43-word message violates a rule requiring that material information be released to all investors at the same time. The outcome of the investigation is important to all companies that use social media to share information about their business with followers.

Earlier this month, Netflix disclosed that it received what is known as a Wells notice from the Securities and Exchange Commission concerning the July posting on Hastings’ Facebook page. In that message, Hastings congratulated his team and said that subscribers had watched about one billion hours of video in June. Although Netflix contends that the information was not material, the matter is not so clear-cut to the SEC, which warned that it could take civil action against Netflix and Hastings.

The rule at issue, Regulation Fair Disclosure or Reg FD, was adopted due to concerns that companies were disclosing material information to small groups of analysts or investors before announcing to all investors.  While it is unclear how this rule will be applied to the Facebook disclosure, the threat of SEC action demonstrates that business use of social media is facing increased scrutiny.  This uncertain environment further demonstrates the need to consult with knowledgeable legal counsel before adopting social media strategies and policies.

These new channels of communication require an updated approach to corporate communications. This is especially the case when non-public information is communicated about public companies and in the case of securities offerings, including initial public offerings.


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