Disclosures via social media

Social media have recently been recognized as a reliable means for disclosure of material information in publicly traded companies in the United States.

Sometime last year, Reed Hastings, chief executive officer of Netflix, an online movie service company, posted on his personal Facebook account that the company’s monthly online viewing had, for the first time, exceeded one billion hours.

By way of background, Netflix makes available, for a fee, video programs to its subscribers through the Internet which can be viewed at their convenience for a certain period of time.

In case the subscribers’ computer system is unable to receive the video signal for technical reasons, the movie discs are delivered to their residence through the fastest means possible.

Since going public in 2002, the company has, to date, over 33 million subscribers.

Shortly after that Facebook posting, Netflix’s stock price went through the roof. Under normal circumstances, that should have been a cause for rejoicing by stockholders and investors.

It turned out that the same information was not disclosed to the investors through a press release or a report filed with the US Securities and Exchange Commission, as required by existing rules.

Development

The posting was the first time Netflix and its CEO used a Facebook account (and personal at that) to announce a significant development in the company’s operations.

What’s more, the company did not inform its investors beforehand that its CEO’s personal Facebook account may be used as a medium for communicating material information to them about the company.

The use of social media outlets in lieu of the traditional means of disclosing vital information to investors prompted the US SEC to investigate Netflix.

At the heart of the probe were its fair disclosure rules which state that companies should “distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time.”

Material information is any information that could influence or motivate a stockholder into selling his stocks or buying more of them, or taking no action at all.

Equal access to information is essential so that no investor who gains such data in advance can buy or sell stocks (and in the process, gain profits or minimize losses) at the expense of other stockholders who did not have access to or were not given the material information.

Disclosure

As the SEC investigator put it, “one set of stockholders should not be able to get a jump on other stockholders just because the company is selectively disclosing significant information.

“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.”

For his part, Netflix’s CEO said the posting of the news in his personal Facebook account about the company’s one billion hours milestone should be considered public in character, especially because many of his subscribers are reporters and bloggers.

In resolving the case, the US SEC cited a circular it issued in 2008 where it stated that the websites of companies can serve as effective means for disseminating information to investors if they have been made aware that’s where to look for it.

The agency recognized that many things have changed since it issued that circular to prevent corporations from selectively releasing information which has not been made public.

It said its fair disclosure rules apply to social media and other emerging means of communication used by public companies the same way it applies to company websites.

Advance info

In determining whether the means used to communicate material information to investors complies with fair disclosure rules, each case must be reviewed or evaluated depending on its attending circumstances, or on a case-to-case basis.

After a careful study of the case, the agency ruled that Netflix and other publicly traded firms may make important corporate information available by Facebook, Twitter or other social media on condition that advance notice is given to investors about the availability of such information in that social media site.

In the end, Netflix was cleared of any liability for breach of fair disclosure rules.

As things stand at present, it is clear social media have come of age and are expected to play, as shown in the Netflix case, a significant role in the business world.

The traditional ways of disclosing material information to the investing public—through press releases, postings at company websites and filing of reports with the regulatory agency—may have to be reexamined to make room for changes in communications technology that are equally, if not more, effective in accomplishing the purpose for which disclosures are required to be made.

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