In July, Netflix CEO Reed Hastings shared good news on Facebook that people had watched more than one billion hours of the company’s video in the previous month. Investors cheered the news and Netflix stock had its best day of the year. But not everyone was impressed.
The Securities and Exchange Commission responded by telling Netflix and its CEO that they are in hot water for violating rules about corporate disclosure. The company said this week that it has received a Wells Notice, meaning Netflix and Hasting are under investigation by the SEC.
So what exactly did Netflix and Hastings do to trigger a federal securities probe? The answer is that they used a Facebook page with more than 200,000 fans to share the news instead of a more traditional method like a press release. In theory, this means that they didn’t give everyone a fair chance to react to a “material event” that affected the share price.
This is silly, of course. As Mike Isaac of All Things D notes, if you want to spread news then the world’s largest social network is a pretty good way to do so. And given the viral nature of the internet, the news will spread far beyond Facebook almost instantly. This should easily meet the legal requirement that companies use a well-read news or wire service or “any other non-exclusionary method.”
What has happened here is that the SEC has gotten caught up in technicalities rather than looking at why we have the rule in the first place. That rule, by the way, is a good one — every investor, and not just insiders, deserve to know when something important happens at a public company. And, in this case, Netflix and Hastings respected the spirit of the rule.
In the bigger picture, the Netflix incident shows how regulators can fail to grasp the massive changes in our communications and transportation infrastructure. Just as mid-20th century taxi laws are ill-suited for the age of car services like Uber, it doesn’t make sense for the SEC to pretend we’re still in the age of the fax machine. As Bloomberg notes, companies like Tesla are using everything from Twitter to company blogs to communicate with investors. The SEC will only lose credibility if it keeps trying to stuff this digital genie back in the bottle.
(Image by DM7 via Shutterstock)
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