Avoiding US federal securities law violations online
Apparently everyone wants to be on the web. A new study says there are now more than 320 mn web pages. Another study shows that most Fortune 500 firms have web sites. In the rush to be part of this exciting medium, however, one risk cannot be ignored: corporate web sites - despite the best of intentions - can easily run foul of US federal securities laws.
Worse yet, regulatory authorities have not released global guidelines for the web. Rather, they have issued a thicket of more than three dozen no-action letters, releases, notices and reports. So, how can a company reduce its risk? The first step, of course, is to understand the risk.
If a company has no securities in registration under the US Securities Act, there are relatively few specific restrictions from the US that govern what it may post to its web site - although general anti-fraud provisions against materially false or misleading statements always apply. But if the company has securities in registration in the US, the considerations become much more complex.
The US securities law implications for web sites differ during each of the three periods of the securities distribution process: a pre-filing period (before the registered securities filing); a waiting period (after filing, but before it becomes effective); and a 'post-effective' period.
Pre-filing caution
A primary consideration during the pre-filing period is to avoid publicity or statements that might be viewed as 'conditioning the market' for the anticipated offering. The concept, of course, is to let the facts - the company's disclosures - speak for themselves. Efforts to whip up anticipation are unlawful.
During this period, a company that already has a web site should avoid making any material changes to the content of that site. Those within the corporation who manage the appearance and content of the site should be involved in the offering process to help avoid even the inadvertent appearance of conditioning the market or providing selling literature to prospective investors. At the outset, the content of the entire site should be vetted with securities counsel and modified as required.
Don't forget that hyperlinks might also be viewed as market conditioning. Hyperlinking, which permits a visitor to a site to click on a 'link' to gain access to another web page, is particularly controversial. Links to favorable analysts' reports or positive news reports might be seen as 'adoption' of potentially false or misleading materials, an effort to condition the market, or an improper effort to deliver supplemental selling literature. So, such links should be scrutinized as early as possible.
A company that plans to launch a web site generally should refrain from doing so during this pre-filing period. Otherwise, it risks charges that it 'jumped the gun' in an unlawful effort to condition the market.
Heavy wait
During the waiting period, written offers to sell securities - including electronic ones - are limited to the preliminary prospectus filed with the SEC and to so-called tombstone advertisements that provide limited, basic information about the offering. Also, market conditioning worries continue to apply, unhooking the power of the web for IR.
Once a company's registration statement is deemed effective, several things change. First, if certain requirements are met, electronic communications may be used to deliver not only tombstone ads, but also the final prospectus, certain types of supplemental selling literature and sales confirmations.
During this period the final prospectus is the primary written means of offering securities for sale - at least while prospectus delivery requirements continue in force. And as one commentator has warned, any actions that might be viewed as an effort to 'undercut the primacy of the prospectus' during this period should be avoided.
So, a company planning to open a new web site might want to delay the launch during the period immediately after the registration statement becomes effective, lest it be accused of using the site to displace the primacy of the prospectus.
What information and links should go up on an existing web site? If the prospectus is posted, the general practice is to post it on its own page within the company's web site and without hyperlinks to other materials. At least one issuer has gone further. It posted the final prospectus to a web site entirely separate from its corporate site to ensure that there were no links to other materials accessible anywhere on the prospectus site.
Do's and don'ts
The SEC's piecemeal regulation of the web has created legal landmines, with a host of factors for the company and its securities counsel to consider. Here's a selection:
* Do create and distribute to all interested persons web site policies written with the securities laws in mind;
* Do keep your investor relations area on the corporate web site separate and ensure that its content is limited to matters that are reasonably related to the interests of the financial community;
* Do put into place procedures to minimize the risk of 'conditioning the market' claims;
* Do screen all web site postings as if they were press releases, shareholder reports or the like;
* Do keep the web site current and establish clear responsibilities for monitoring to maintain its timeliness;
* Do be wary of hyperlinking, especially from a posted prospectus;
* Do keep the site entirely separate from analysts and their reports. If these must be referenced for some reason, make it clear that the company does not adopt or otherwise put its imprimatur on such reports;
* Do establish written procedures for correcting errors on your web site and follow them promptly if such an error is discovered. Corrective disclosure may be necessary;
l Do take reasonable precautions to protect the site against hacking (unwanted interference with the site by unaffiliated third parties). Use reasonably current technology to protect the site.
* Don't establish a new web site or materially expand or alter a pre-existing web site until the securities offering is completed;
* Don't incorporate the company web site by reference or by hyperlink into any electronic version of the company's preliminary prospectus posted to the web. (As for the registration statement, the SEC has indicated that merely identifying the company's web site in the statement does not, by itself, incorporate the site into the statement);
* Don't post only positive press releases or positive news reports since the company might then be accused of materially false or misleading conduct;
* Don't leave old news items or press releases available on the same web page as current and timely materials. Instead, archive the older material and include a link to the archive with appropriate disclaimers as to the timeliness of the information;
* Don't forget to include a listing of the risk factors that any investor must consider before deciding whether to invest in the company's securities or not;
* Don't include undue hype anywhere in the web site;
* Don't use a corporate web site to engage in general discussion about an offering. Such communications likely will run afoul of laws or regulations;
* Don't forget to work with securities counsel on general and specific disclaimers to be posted on the web site. For example, don't forget to include disclaimers of any duty or intention to update information on the site, and devote 'forward looking statement' disclaimers where appropriate;
* Don't neglect to train employees who may not be involved with the company's web site, but who have access to the internet for work or personal purposes. This will reduce the risk that their conduct or statements while using the internet might subject the company to liability under the securities laws.
There is one final don't that cannot be overemphasized: don't shy away from the web altogether for fear of the securities laws. Instead, be armed with the appropriate knowledge and seize the initiative. The web is a powerful medium and, as the oft-quoted Marshall McLuhan emphasized, the medium is the message.
Blake Bell is associate counsel with Simpson Thacher & Bartlett in New York, specializing in 'cyberlaw', securities litigation and commercial litigation. He can be reached at b_bell@stblaw.com. This article reflects his views, not necessarily those of his firm.