Under the federal securities laws, public disclosure is a defense to a number of possible violations. One definition of insider trading, for example, is the purchase or sale of securities on the basis of non-public information. To the extent the information used to make the trades was public, there is no violation.
Similarly, under Regulation FD, companies are not allowed to selectively disclose material non-public information to investors or analysts (among others). To the extent that the information is distributed to these persons, it must also be disclosed to the public. As the adopting release noted:
The timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional; for an intentional selective disclosure, the issuer must make public disclosure simultaneously; for a non-intentional disclosure, the issuer must make public disclosure promptly.
Exchange Act Release No. 43154 (Aug. 21, 2000).
All of this begs the question as to what constitutes public disclosure. The issue has come up because of reports that the SEC is looking into efforts by Netflix to disclose information over social media, particularly Facebook. According to the WSJ, the SEC warned Netflix about disclosure over Facebook that Netflix "exceeded 1 billion hours of video streaming in a month for the first time."
Using Facebook to reply, the CEO of Facebook equated disclosure over Facebook with disclosure to the public.
- He said further disclosure at the time wasn't necessary because he has more than 200,000 subscribers to his Facebook page, which makes it a "very public" forum. Netflix had also disclosed on its blog in June that it was nearing the 1 billion streaming hours milestone, he said. Mr. Hastings, who is also on the board of Facebook, added that, at any rate, such information isn't a "material" event to investors.
The interaction, therefore, raises the question as to whether disclosure over social media constitutes public disclosure under the federal securities laws. The answer is a decided "maybe."
The SEC discussed this issue in the adopting release for Regulation FD. The Release noted that public disclosure could occur through "press releases distributed through a widely circulated news or wire service, or announcements made through press conferences or conference calls that interested members of the public may attend or listen to either in person, by telephonic transmission, or by other electronic transmission." Although social media was not in existence at the time of the release, the same rational would apply.
But it was not enough to simply post the information or diclose it in a conference call open to the public. As the SEC noted, the "public must be given adequate notice of the conference or call and the means for accessing it." The Commission, however, recognized that sometimes the public would be aware that important information was revealed through a web site. See Id. ("As technology evolves and as more investors have access to and use the Internet, however, we believe that some issuers, whose websites are widely followed by the investment community, could use such a method.").
In 2000, when the release was issued, use of the Internet was uneven. Companies often did not have web sites. Move forward more than a decade and things have changed. Most if not all public companies have web sites and most regularly post press releases, SEC filings, and other important information. Today, disclosure over the Internet for most public companies likely meets the defintion of public disclosure.
Social media is not in the same position. At least right now it does not appear to be a common avenue for the exclusive distribution of material nonpublic information. Thus, it is not enough to contend that the information is accessible to large swathes of the public (as it surely is). The issue is whether the information is regularly accessed by the investment community.
Eventually, social media will be a regular method of disseminating material nonpublic information. In the short term, companies can enhance this possibility by giving notice of impending announcements so that the public (and the investment community) will know to access the source. Moreover, as information is regularly distributed in this fashion, analysts and other members of the investment community will regularly access the source, making notice unnecessary.
But for now, in this transitional period, companies are better off using social media as an additional rather than exclusive source of public disclosure.