Why Facebook Doesn’t Count as Public Disclosure

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Reed Hastings’ post on Facebook does not count as public disclosure according to the SEC. The agency sent a notice to Hastings and Facebook to that effect soon after the post. Since then, Hastings’ defense has centered around the contention that the information was not material. No claim that a Facebook post is public has been made.

Facebook Is Not Public Disclosure

Regulation FD requires that publicly traded companies disclose all material information publicly. It prevents the practice of selectively telling Wall Street analysts or other people news about the company. While the technology community thinks otherwise, the SEC does not consider a post on Facebook as public for this purpose.

The SEC published guidance in 2008 regarding the disclosure of material information online by publicly traded companies. A central tenet of that piece was that the company must make it clear that is does, and will, publish such information online. In addition, the company must make it clear WHERE such information will be published. Finally, investors must EXPECT that material information will be posted in such a location.

Since 2008, most publicly traded companies have gone on to include in their traditional printed materials a notice stating that the company can and will publish material information online, typically on the company’s own website. Doing this fulfills the requirements that the company notify investors and the continued publication ensures investors do expect to find such information on the company’s website. Despite this setup, most companies continue to disclose material information online either simultaneously with traditional methods, such as press releases, or after a traditional disclosure.

Facebook has not done anything to indicate to investors that it would disclose material information on Facebook. As such, investors do not expect to find it there.

What the technology community so often fails to understand is that not “everyone” gets news or financial information online. Not “everyone” uses Facebook. And, most certainly, not “everyone” who is an investor, or potential investor, in Facebook follows the companies postings there, or “Likes” the company. As such, all the investors who were not among the 225,000 or so followers of the company’s Facebook page got untimely disclosure.

In the end, the only way for Hastings and Netflix to avoid SEC action will be to convince the agency that the information posted was not material. That might be a tough trick consider the substantial move in the company’s stock price following the post.

(This is a quick, lightly edited posting in regards to investing news. This post may be updated or a follow-up posted.)

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