Facebook Isn't Public Enough

Curtis Franklin Jr., Executive Editor | 12/7/2012 | 20 comments

Curtis Franklin Jr.
Is a social network -- even one as big as Facebook -- big enough to make a post a "public" notice? The SEC says no.

Here's the issue: When the official of a public company makes a financial statement that indicates something important about the company's market, condition, or performance, it should be said in a forum (and a form) that's accessible to pretty much anyone who's interested in the company. In the past, that's been defined as "the press," meaning standard newspapers and television stations, or in carefully prepared forms and statements in a format approved by the SEC. A few months ago, though, the CEO of Netflix stretched the definition of "public," and the SEC is only now moving toward creating a rule about it.

Back in July, Reed Hastings, the CEO of Netflix, posted on his Facebook page that the company had exceeded one billion hours of viewing in June, and would probably break that record in coming months. Not surprisingly, the share price of Netflix went up after the announcement, and the SEC decided to take a look at what Hastings said -- and where he said it.

Hastings had, at the time of the post, about 200,000 fans of his page. As of this writing, he's up to around 245,000. The narrow question for the SEC would be whether 200,000 potential viewers makes the statement "public." The broader question is whether any social network, whether Facebook, Twitter, or something yet to be developed, could rise to the standard of a vehicle for public disclosure. The initial indication, based on a notice Netflix says it's received, is that Hastings committed a disclosure violation. It's likely the SEC is going to maintain the point of view that Facebook pages aren't public for the purpose of the law, and that more traditional means must be used for disclosure. That rule would have some interesting consequences for CIOs of publicly-traded companies because it strikes at the heart of financial disclosure rules.

One of the joys of social networks (especially Twitter) is that they give at least the illusion of unfiltered access to the thoughts of celebrities and business leaders. That's fine, and there are some subjects ("Why I prefer marmalade to jam on my morning toast") that are fair game for corporate offices in a rough-and-ready context. If those officers are going to spout off about anything related to the company's financial condition or possibilities, though -- or, for that matter, on any subject at all that could reasonably have an impact on the company's stock price -- then the spouting off needs to be run through the traditional financial disclosure channels.

This is not a problem that lends itself to a technological solution. Filters are nice, but short of a firewall that simply blocks all access to Facebook and Twitter (and good luck on installing such a thing on your CEO's private tablet), you're going to have to depend on carefully constructed rules that are communicated fully, well, and often to anyone who might be affected by them. It is, in short, a human knowledge and relations problem, not a technology problem. Because the process involves computers, though, it's your problem.

There are few areas of technology or commerce in which rules actually run ahead of technology. In most cases, they lag behind and are only brought into clear focus when someone does something that, in retrospect, is seen to have been a violation. This is such a case, and it's not likely to be the last. CIOs in public companies should get in front of this by working with marketing and legal to establish clear, conservative rules. Things can always be slightly loosened if the SEC changes its mind, but I don't think any of you are so bored that you want to volunteer to be part of the next precedent-setting court case.

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Syerita Turner   Facebook Isn't Public Enough   12/19/2012 5:50:12 PM
Re: Facebook Isn't Public Enough
As we all know when statements go public it takes on a life of its own. Many people just go with the flow and not think about the Consequences of the words spoken. Facebook being a site that all eyes are following it is hard not to get sucked into the hype.
michaelsumastre   Facebook Isn't Public Enough   12/11/2012 10:40:10 AM
Facebook Isn't Public Enough
Well, I guess Hastings was just extremely excited. It can be recalled that Netflix experienced a lot of trouble a few years ago. And I guess any major feat you want to share it with the people you care about the most than your investors. But then, you know, every action has an opposite reaction, and he has to face the music with SEC in due time. I wonder how much penalty he's going to get, if ever. In the meantime, yeah, if this case prospers, then it's definitely going to change the way public-listed companies are going to disseminate information to basically anyone. 
stotheco   Facebook Isn't Public Enough   12/11/2012 5:32:19 AM
Re: On with the show...
Interesting bits of trivia about Hastings. The stories sound good--maybe too good to be true? Seems like he is a born storyteller with a knack for turning situations around in the most unusual way. He also sounds like a pretty impulsive person. Perhaps it has paid off though, in his career and business.
stotheco   Facebook Isn't Public Enough   12/11/2012 5:30:35 AM
Re: Clear rules
Wow, it looks like he might have made quite an expensive mistake. I agree that his page is not as public as he thought it to be. After all, not every one in this world has Facebook. Whatever the SEC penalizes him with, I'm sure this is one mistake he will not be quick to forget.
Technocrat   Facebook Isn't Public Enough   12/11/2012 1:12:23 AM
Re: Clear rules
@Curtis  I think you are correct,  I had not thought of it in those terms and I am sure this is going to be an expensive question !

Could have been a much cheaper way to find out I would think.
LuFu   Facebook Isn't Public Enough   12/10/2012 2:01:20 PM
On with the show...
My ears always perk up when I hear or read about another Reed Hastings misstep. After all, he was inspired to create Netflix because he couldn't remember to return Apollo 13 to a video store and racked up $40 in late fees. Seems like it was easier to start up a company than return a video on time. Then of course, he didn't bother to check with their customers to see if anyone really wanted to rent DVDs from something called Qwikster while their online streaming customers continued with Netflix.

One thing to remember, Hastings is in the entertainment business and following him in the news, on Facebook, or wherever is quite entertaining.
CurtisFranklin   Facebook Isn't Public Enough   12/10/2012 11:59:44 AM
Re: Clear rules
@Technocrat, the SEC can levy some very substantial fines and has the power to seek jail time for company officers (though I can't imagine that they would do the latter in this case). To your hypothetical of a company deciding the reward of limited disclosure is worth the cost, I think the SEC can convince them otherwise.

CurtisFranklin   Facebook Isn't Public Enough   12/10/2012 11:57:16 AM
Re: Clear rules
@Technocrat, you're right: The CEO should have known better. That's why there's a big piece of me that thinks he did this deliberately in order to force the SEC to say something definite on the subject. He got his wish -- now we'll all find out how much the SEC is going to charge Netflix for asking the question!
CurtisFranklin   Facebook Isn't Public Enough   12/10/2012 11:55:31 AM
Re: Clear rules
@Umair, you're right: Company officers need to be very careful about what they say, and where. That's always been the case, but we've somehow gotten the notion that the social networks are different. The SEC is saying that they're not different -- the same rules apply to Facebook that apply to comments at a conference or interview given to the editor of a newsletter. If you're going to provide information that could change the price of a stock, you have to release it to "the public" first.
CurtisFranklin   Facebook Isn't Public Enough   12/10/2012 11:53:08 AM
Re: the dangers of social networking
@Pedro, you raise some good points, though I don't think any of these are at the heart of the SEC's objection. They are much more concerned that a company's officers will release information to "insiders" -- a select few individuals who can then make stock ownership decisions with more information than is available to the general public.

The SEC feels that it's important to have a level playing field -- essentially the same official information available to anyone who might want to trade in a particular stock -- to maintain confidence in the integrity of the market. If that confidence goes away, then the stock market as anything but a way for a few people to get very rich goes away, too.
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