How Netflix Made The SEC Like Social Media

Back in July, Netflix (NASDAQ:NFLX) CEO Reed Hastings posted to his personal Facebook (NASDAQ:FB) page that monthly online viewing had exceeded 1 billion hours for the first time. The event was a catalyst for the stock, and sparked a conversation that eventually turned into an investigation by the U.S. Securities and Exchange Commission into the relationship between social media and disclosures of company information.

The question is whether or not information posted to social media outlets like Facebook or Twitter is easily accessible to all investors. “One set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information,” said George Canellos, acting director of the SEC’s Division of Enforcement, in a statement.

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To add some context, Hastings posted the comment on July 3. Netflix stock increased more than 20 percent in value between July 2 and July 4.

It is critical to a market’s functionality that it be fair. If there is information inequity, then bad actors can game stocks and not just rip off investors, but hurt the entire system. As the metric is a proxy for the appeal of its product, Hasting’s comment about viewing hours was enormously relevant to investors. And although it was very quickly rebroadcast throughout the mediasphere, the information disseminated in an inequitable way, and investors not on Facebook were at a temporary disadvantage…

In an email to Bloomberg, Lynn Turner, a former chief accountant at the SEC, said that “many investors, especially those over 50, who in the aggregate have the most invested, still do not use social media.” Traditionally, companies disclose information through press releases or filings with the SEC, and the release date for important information like earnings are broadcast well in advance.

“Telling someone who does not use Twitter to go to Twitter for significant investment information is one of the dumber ideas I have heard,” Turner continued.

But for better or worse, the SEC will allow companies to do exactly that, assuming that they give notice that investors should look to social media for important information. In a report released on Tuesday, Canellos said that “Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don’t know that’s where they need to turn to get the latest news.”

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At the end of the day, the SEC decided that its investigation into Hastings’ comment “confirms that Regulation FD applies to social media and other emerging means of communication used by public companies the same way it applies to company websites.” Regulation FD is the one that requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively.

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