On April 2, 2013, the SEC issued as an Exchange Act release a Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings (Report). In the Report, the SEC decided not to pursue an enforcement action against Netflix or its CEO, Reed Hastings.

Netflix, Inc. announced in a Form 8-K filed on December 6, 2012 that the company and its CEO each received a Wells Notice indicating that the SEC may bring action against them for an alleged Regulation FD violation. The incident occurred in July 2012, when the CEO posted on his personal Facebook page congratulations on achieving a milestone: "monthly viewing exceeded 1 billion hours for the first time ever in June."

Although falling short of expressly stating so, the SEC included some key facts that could lead to a determination that the monthly viewing hours metric is material to Netflix. Some of these facts include:

Perhaps the decision to not bring an enforcement action can be attributed to the SEC's express recognition that there has been market uncertainty about the application of Regulation FD to social media.

Whether disclosures comply with Regulation FD must be evaluated on a case by case basis. However, the SEC stated that disclosure of material nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to satisfy Regulation FD. It is likely not a method "reasonably designed to provide broad, non-exclusionary distribution of the information to the public" that Regulation FD requires. The SEC stated this is true even if "the individual in question has a large number of subscribers, friends or other social media contacts, such that the information is likely to reach a broader audience over time."

The CEO's Facebook page had over 200,000 subscribers at the time of the post, including equity research analysts associated with registered broker-dealers, shareholders, reporters and bloggers. However, neither the CEO nor Netflix had previously used this Facebook page to announce company metrics. Instead, Netflix has consistently directed the public to its own Facebook page, Twitter feed, blog and web site for information about Netflix.

The SEC has long rejected a one size fits all approach to Regulation FD disclosure and has considered and even encouraged "honest, carefully considered attempts to comply with Regulation FD." The SEC used the Report to formally make its position on social media disclosure clear, a position the staff of the Division of Corporation Finance has indicated on many occasions:

The SEC expects issuers to examine rigorously the factors outlined in the website guidance that indicate whether a particular channel is a recognized channel of distribution for communicating with investors. The Report focuses on notifying the market about which forms of communication, including the social media channels, a company intends to use for the dissemination of material nonpublic information. To help establish social media outlets as recognized channels of distribution, companies should regularly inform investors how they use social media, including the type of information disclosed through a social media channel, where it can be found and when they typically disclose the information. This information can be:

In the Report, the SEC made it clear that it is not trying to inhibit corporate communications through evolving social media channels and is encouraging companies to seek out new forms of communication to better connect with shareholders. After a company has made the public aware of the channels of distribution it expects to use so the public knows where to look for disclosures of material information about the company and what it needs to do to be in a position to receive this information, the SEC does not expect that this guidance would limit the channels of communication a company could use.

PLC Corporate & Securities has several resources to guide companies and their counsel through social media and Regulation FD issues and compliance: