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Netflix Boss in Hot Water over Facebook Post
Ever wondered what happens to publicly traded companies when they get in trouble? Students go to the principal’s office; companies get scolded by the SEC. I am not so sure where Netflix CEO Reed Hastings would prefer to be (school principal’s office perhaps) but reports are that the Netflix boss is under investigation for talking to Facebook and revealing certain bits of information about his company’s performance.
In June this year the Netflix boss made a Facebook status update which highlighted much of how Netflix was performing in the months leading up to the summer. Hastings dropped information about several things but the bit that got attention was the data surrounding the number of hours people were watching video. In the post, Hastings mentioned that no fewer than 1 billion hours of video was watched by subscribers in June. This mention was picked by several news agencies and the details ‘somehow’ ended up on Wall Street. As a result Netflix’s stock rose and the SEC doesn’t like that. The question is why?
Regulation Fair Disclosure
The SEC has lots of rules that govern how publicly traded companies behave and one of them is Regulation Fair Disclosure or REG FD as it is known among companies. The piece of legislation was enacted by the SEC back in 2000 and ensures that information that is important for making investment decisions about a company be revealed to all investors at the same time. REG FD was the antidote for ‘selective disclosure’ which was rampant among companies up to this time.
Wikipedia paints a vivid picture of how important REG FD is in the age of modern investing: “Regulation FD fundamentally changed how companies communicate with investors by bringing more transparency and more frequent and timely communications, perhaps more than any other regulation in the history of the SEC. Most of the corporate announcements are issued in press releases or during the conference calls and are summarized at websites.”
Facebook and investment decisions
The big issue here and going forward will be how the SEC looks at a Facebook post in relation to ‘material information’ disclosed by a company. It would appear by the content of the update made by Hastings that he, along with his advisors, felt the post would comply with SEC regulations.
Here’s is what the Netflix boss said in response to news that his company was under investigation: “First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers. Second, while we think my public Facebook post is public, we don’t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings. We think the fact of 1 billion hours of viewing in June was not “material” to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month. Finally, while our stock rose the day of my public post, the increase started well before my mid-morning post was out, likely driven by the positive Citigroup research report the evening before.”
The outcome of this investigation will almost certainly have implications for other companies and REG FD itself. In this age Facebook is pretty much on par with blogs and other forms of electronic media. It therefore follows that the disclosure of ‘material information’ can be achieved by not just releasing information through these traditional channels, but on Facebook itself.
This is an interesting one indeed and we’ll surely keep you posted—pardon the pun.