The Securities and Exchange Commission has decided that Facebook (FB) is not a legitimate means of communication.
The agency filed a Wells Notice against online movie purveyor Netflix (NFLX) because it claims that by posting information on Facebook, Netflix was limiting its access. The posts in question were by Netflix Chief Executive Reed Hastings, boasting that its viewers had downloaded 1 billion hours of streaming video in June. The SEC claims this constituted “material information” about the company’s results and should have been publicly disclosed.
Even though Hastings’ post was made on a public Facebook page—accessible to anyone—where he has more than 200,000 fans, the SEC claims that does not qualify as a public disclosure because it doesn’t recognize social media as a legitimate means of transmitting information to the public.
The SEC’s ruling demonstrates a lack of understanding of social media and will ultimately hurt the average investor by stifling companies’ social media communications.
At issue is the SEC’s Regulation FD (“Fair Disclosure”), which was put in place to make certain small investors have access to the same information granted to institutional investors. As a result, most corporations opened their earnings calls to the public and began webcasting major events, providing all investors with more transparency. The SEC is attempting to use Regulation FD to shut down communications on the most public forum of all—Facebook.
The irony of this is that social media are potentially a great equalizer for small investors. Despite Regulation FD, large investors still have many advantages over small investors. They often have direct access to CEOs, chief financial officers, and other key managers at the companies they follow—something not available to the average investor. While these meetings cannot legally involve the disclosure of material information, they often help institutional investors form a clearer impression of the corporation’s prospects.
Social media can be a way to level the playing field for small investors. They provide the kind of equal-access forums and transparency that are exactly what the SEC was seeking when it enacted Regulation FD. A few forward-thinking CEOs, such as Elon Musk of Tesla Motors (TSLA) and Tony Hsieh from Zappos (AMZN), recognize this and have regular conversations with average investors on Facebook and Twitter. (Neither Musk nor Hsieh has said he will do anything differently on Facebook as a result of the Netflix issue.)
If the agency has its way, there won’t be a single executive making posts on social media again for fear of an SEC reprimand. (The SEC itself has a Facebook page for recruitment, with more than 1,161 likes, and another that is a copy of the Wikipedia entry on the agency, 772 likes.)
The SEC wants CEOs to use legacy vehicles, such as press releases, investor conference calls, or formal SEC filings to communicate. The problem with these communications is they are cold, formal, and often don’t provide meaningful insights into company leaders’ thinking. Individuals and organizations that use social media have discovered it is a much richer, more effective way to communicate.
President Barack Obama is one of them. He has amassed 7.9 million Facebook fans. During his election and reelection he regularly used social media to disseminate critical information to his supporters.
Unfortunately, his appointees to the SEC—Mary Schapiro and Elisse Walter—don’t seem to share this same appreciation for social media. Maybe the President should get them both Facebook accounts so they can try it out.