Facebook Is Now an Essential Tool for All Investors

It's easy to view the social networking site Facebook as nothing more than a pointless time warp for young whippersnappers with way too much time on their hands. But after a ruling yesterday by the Securities and Exchange Commission, it may become an essential component of any serious investor's toolbox.

How we got here started innocently enough. On July 3, 2012, Reed Hastings, the chairman and chief executive officer of Netflix , posted the following message on his personal Facebook page:

Congrats to Ted Sarados, 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!

Seems harmless enough, right? Hastings was simply boasting -- and deservedly so -- about the fact that the customers of his popular video streaming company had watched a cumulative one billion hours' worth of content in a single month. This matters because, as Hastings explained on a conference call last year, it's "a measure of an engagement and scale in terms of the adoption of our service and use of our service ... [and] shows widespread adoption and usage of the service."

In a day and age when seemingly everything is broadcast over some type of social media, be it the birth of a child or an engagement or whatever, Hastings' use of his personal Facebook page to celebrate a somewhat esoteric milestone wasn't either unusual or typically out of the ordinary. Unless you're a securities regulator at the SEC, that is.

The problem was that Hastings' comment abutted against Regulation Fair Disclosure, or Reg FD, which mandates that publicly traded companies disclose material, nonpublic information to all investors at the same time. It was adopted roughly 12 years ago out of concern that companies were selectively "disclosing important nonpublic information, such as advance warning of earnings results, to securities analysts or selected institutional investors before making full disclosure of the same information to the general public."

Thus, the question concerning Hastings' posting on his personal Facebook page was whether or not it constituted a full and public disclosure of presumably material information. To drive this point home, here was the sequence of events that followed, as recounted in the SEC's ruling:

The announcement of the streaming milestone reached the securities market incrementally. The post was picked up by a technology-focused blog about an hour later and by a handful of news outlets within two hours. Approximately an hour after the post, Netflix sent it to several reporters, but did not disseminate it to the broader mailing list normally used for corporate press releases. After the markets closed early at 1:00 p.m., several articles in the mainstream financial press picked up the story. Research analysts also wrote about the streaming milestone, describing the metric as a positive measure of customer engagement, indicative of a reduction in the rate Netflix is losing customers, or "churn," and possibly suggesting that quarterly subscriber numbers would be at the high end of guidance.

Generally speaking, since the widespread adoption of websites, a company has disseminated material, nonpublic information in one of two ways. First, by posting it on the company's investor relations webpage. And second, by filing a form 8-K with the SEC, which is then published on the latter's EDGAR site. The use of social media, in other words, hadn't previously been considered as a legitimate avenue to disclose information that could influence the performance of a company's stock.

Until now, that is. The SEC's ruling in this case has effectively condoned the use of social media channels for this purpose -- though, the only two channels expressly mentioned were Facebook and Twitter. Companies must nevertheless keep three things in mind. First, whether or not the disclosure does, in fact, contain material, nonpublic information as covered by Reg FD. Second, "if the [company] were to elect not to file a Form 8-K, the [company] would need to consider whether the information was being disseminated in a manner reasonably designed to provide broad, non-exclusionary distribution of the information to the public" (emphasis mine). And third, whether the specific channel -- be it Facebook, Twitter, or MySpace (just joking about the last one) -- is a "recognized channel of distribution."

So, what does this mean for investors? It means that social media forums such as Facebook are no longer simply places to post self-gratifying pictures, publicize your relationship status, or make ostensibly irreverent comments about whatever's on your mind. They may soon become a serious place for serious investors to get serious information.

Is Facebook a good stock for investors?
After the world's most hyped IPO turned out to be a dunce, most investors probably don't even want to think about shares of Facebook. But there are things every investor needs to know about this company. We've outlined them in our newest premium research report. There's a lot more to Facebook than meets the eye, so read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.

The article Facebook Is Now an Essential Tool for All Investors originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Facebook and Netflix. The Motley Fool owns shares of Facebook and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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