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SEC mulls hitting Netflix with suit over news shared on Facebook

Securities and Exchange Commission warns Netflix it may take civil action against company for disclosing a big streaming milestone on CEO's Facebook page instead of more formally.

Sharing news on Facebook may have landed Netflix in hot water with U.S. regulators.

The Securities and Exchange Commission yesterday gave Netflix and its chief executive, Reed Hastings, a "Wells Notice" regarding how Reed disclosed some information about the company. What that essentially means is that the SEC may take some sort of civil legal action against Netflix because of something Hastings posted on his Facebook wall about a new video-streaming milestone.

The SEC believes Netflix should have made a more formal announcement instead of simply notifying visitors to Hastings' Facebook profile. A Regulation Fair Disclosure, which the SEC cites in its notice to Netflix, is meant to ensure that individual investors have the same access to information as large institutional investors by banning selective disclosure of material information.

Here's the full regulatory filing today:

On December 5, 2012, Netflix, Inc. ("the Company") and its Chief Executive Officer Reed Hastings each received a "Wells Notice" from the Staff of the Securities and Exchange Commission ("SEC") indicating its intent to recommend to the SEC that it institute a cease and desist proceeding and/or bring a civil injunctive action against Netflix and Mr. Hastings for violations of Regulation Fair Disclosure, Section 13(a) of the Securities Exchange Act and Rules 13a-11 and 13a-15 thereunder. A copy of a statement that will be made by Mr. Hastings to subscribers on his publicly available Facebook page is attached as Exhibit 99.1.

The issue stems back to a disclosure Hastings made on his Facebook page in early July. In his post, Hastings announced that for the first time, more than 1 billion hours of video were streamed on Netflix in a single month.

Here's the original post that now has him in trouble:

Congrats to Ted Sarandos, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we'll blow these records away. Keep going, Ted, we need even more!

The action by the SEC this week raises interesting questions about how companies should disclose information in an increasingly digital-focused world. Already, many companies have stopped issuing press releases over wire services, preferring instead to publish the information on their own sites or company blogs. While they often still file regulatory forms with the SEC, they're largely cutting out one traditional mode of notification.

Meanwhile, as social media plays a bigger role in organizations, the medium is likely to become a more common way for companies to provide information to stakeholders. But at least according to the SEC in this Netflix situation, that's not good enough.

Along with questions about what this means for disclosures in the social-media age, the issue also raises some debate about what's material for a company to disclose. Netflix believes the tidbit it shared in July shouldn't matter to investors, but one could argue that's not the case. For Netflix, the reception to its streaming service is an important issue, and one that could greatly affect the company's future.

Hastings, in a new Facebook post today, rebutted the complaints of the SEC, saying that Netflix considers his post to be public because he has so many subscribers (now "followers." Thanks, Facebook).

Hastings also argued that the information shared wasn't material to the company, and Netflix doesn't rely on social media to communicate material information to investors. In addition, he said, the stock bounce Netflix saw that day already had started before his Facebook post.

Hastings noted that Netflix often discloses information in blog posts without issuing a press release or regulatory filing. For example, it notified members in June that its members were watching nearly a billion hours per month of Netflix.

"We remain optimistic this can be cleared up quickly through the SEC's review process," Hastings said.

We've contacted Netflix and will update this post if the company has any additional information or comment.

Here's the full text of Hastings' reaction on Facebook today following the SEC notice:

SEC staff questions a Facebook post. Fascinating social media story.

We use blogging and social media, including Facebook, to communicate effectively with the public and our members.

In June we posted on our blog that our members were enjoying "nearly a billion hours per month" of Netflix, and people wrote about this. We did not also issue a press release or 8-K filing about this.

In early July, I publicly posted on Facebook to the over 200,000 of you who subscribe to me that our members had enjoyed over 1 billion hours in June, highlighting how strong our content was. There was press coverage as there are many reporters and bloggers among you, my public followers. Some of you re-posted my post. Again, we did not also issue a press release or file an 8-K about this.

SEC staff informed us yesterday that they are recommending that the SEC bring a civil action against us for my July 1 billion hour public post, asserting we violated "Reg FD." This rule is designed to ensure that individual investors have equal access to information as large institutional investors, by prohibiting selective disclosure of material information. The SEC staff believes that I gave you all "material" investor information in my post and that we needed to instead release the June viewing fact "publicly" with an 8-K filing or press release.

I want to note a few things.

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.

We remain optimistic this can be cleared up quickly through the SEC's review process.


Update, 3:35 p.m. ET: Adds analysis, along with a mention of our attempt to contact Netflix for more information.