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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Technology and Regulation: The Road Ahead

Remarks by

Commissioner Laura S. Unger

U.S. Securities & Exchange Commission

At the San Diego Securities Institute

January 27, 2000

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Ms. Unger and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission's staff.

By any measure, this is an exuberant time in the history of the stock market -- even according to our Fed Chairman. Whether rational or not, the market has now sustained an unprecedented decade of growth. A recent Federal Reserve survey notes that almost half of all households own stock. Partly attributed to increased stock ownership, median household net worth surged over 17% between 1995 and 1998.

Not only are more Americans investing in the stock markets, but they are beginning to do so virtually on their own (pardon the pun). At last count, at least 18% of investors used the Internet to buy or sell stock.

The Internet has democratized Wall Street by providing retail investors access to investments and information previously open to only the big guys. It has allowed online firms to open up IPOs to retail investors and issuers to communicate more readily with their shareholders.

These phenomena have raised significant regulatory and interpretive issues for the Commission. Today, I would like to talk briefly about how the Internet is changing things for investors and issuers and what the road ahead looks like for the Commission -- at least in the near term.

The Capital Raising Process -- Individual Access to IPOs

Issuers raised over $2 trillion from investors in 17,000 offerings last year. Less than one percent of the 17,000 offerings represented issuers’ initial foray into the public capital markets. These issuers raised the record amount of $69.2 billion -- about the size of the 1998 U.S. budget surplus.

Last year also showed an increase in retail investors’ participation in IPOs. These investors typically accessed the IPO through an online brokerage account.

About a dozen firms have already become online distribution channels for IPOs. These firms generally offer a portion of an IPO to individual investors. During the last six months of 1999, about 38% of IPOs had an online distribution component and approximately 2.75% of all IPO shares went to online investors. Of the 38% that included an online component, approximately 6.33% of those shares went to online investors.

These developments have caused the Commission to examine how issuers can benefit from having their offerings distributed online quickly and efficiently without violating the investor protection provisions of the ‘33 Act. As you know, the ‘33 Act prohibits brokers from selling an offering before it is deemed effective or from using written or broadcast information that is not part of the prospectus during the waiting period.

Before brokers could sell IPOs online, the Commission had to address a particularly sticky legal issue -- how to avoid preffective sales. Generally, the Commission staff has seen two approaches to the sale of IPO shares online.

One way to sell shares online is to ask investors to indicate their interest in buying shares before the registration statement goes effective. The broker then creates a binding contract by reconfirming the investor’s intent after effectiveness and pricing. Because an indication of interest doesn’t bind the investor to buy shares, investors can make them a long time before the offering.

Another way to sell shares online is to ask investors to make "conditional offers to buy" shares within a certain price range. Assuming that the broker prices the shares within the range and no recirculation of the prospectus is required, the conditional offer becomes binding shortly after effectiveness, pricing, and notification to investors. That notification must give investors some time to withdraw their offers. These offers may only remain open for a week so that investors are aware of the timing of their investments as the market changes and the deal develops.

This audience -- and certainly one of my fellow panelists -- is familiar with the Commission staff’s thinking on this issue. The staff issued its most significant no-action letter regarding the online offering process to Wit Capital last July so that it could conduct an offering entirely via e-mail. In that letter, the staff allowed Wit to take conditional offers to buy shares without deeming it to be a preffective sale.

Access to Information, What Do Issuers Tell Investors?

As I mentioned earlier, the Internet has made it possible for issuers to widely disseminate information of any type to investors. We are just beginning to see how significantly this will impact the marketplace and investors. Technology and the Internet make it possible for the average Joe or Jane to obtain information previously available only to institutions.

For example, the average investor may now access certain analyst conference calls electronically. About 10% of respondents to a June 1999 survey by the National Investor Relations Institute broadcast their conference calls over the Internet. An additional 35% of respondents also said that they were considering doing so. Many companies that don’t broadcast conference calls online let retail investors listen to the calls. More than of half of issuers in the survey said they let investors listen in, up from about a third a year earlier.

Theoretically at least, this should put an end to selective disclosure. As you all know, selective disclosure occurs when issuers disclose material nonpublic information selectively -- hence the term -- to analysts and institutions, rather than to all investors. Right now, selective disclosure appears to be a particular problem when issuers talk to analysts. These selective disclosures can occur at roadshow presentations, exclusive investment bankers’ conferences, and during conference calls.

Why do issuers selectively disclose, especially if they run the risk of committing a securities law violation? In many cases, issuers feel pressure to court analysts so that they receive favorable coverage or at least avoid negative coverage arising out of earnings surprises.

According to NIRI, about two-thirds of companies with market capitalizations of less than $500 million cited the need to increase analyst coverage as their most pressing challenge. Press reports indicate that most cases of selective disclosure involve issuers disclosing earnings information to analysts. In a 1998 NIRI survey, 26% of issuers responded that they would likely selectively disclose information to analysts regarding their earnings results if they knew that those results would be well below consensus estimates.

Of those that would selectively disclose:

  • more than half would contact analysts directly to tell them they were no longer comfortable with the range of estimates and why;
  • one-third would arrange a conference call with analysts and suggest reviewing projections in light of developments; and
  • a minority would give new estimates to the analysts in the course of their conversations.

In the past, the Commission could charge issuers who selectively disclosed material nonpublic information with tipping violations under insider trading law. Because of the Supreme Court’s decision in Dirks, however, the Commission would have to show that the insider benefited, either directly or indirectly, from his or her disclosure to establish a breach of duty to shareholders. This burden of showing a benefit complicated the questions of when there was a violation.

Last month, the Commission proposed a new Regulation FD to address selective disclosure in a different manner. Proposed Regulation FD instead creates a new two-tiered disclosure obligation for issuers. Public companies could only intentionally disclose material nonpublic information if they simultaneously disclosed that information to all investors. Inadvertent selective disclosures would require only prompt subsequent disclosure to all investors.

The Commission’s goal is to increase information flow with Regulation FD. However, we are sensitive to the issue of whether this will instead chill information flows. We are aware that there are a lot of difficult issues that this proposal may raise, particularly in relation to securities offerings. For example, could an issuer use Form FD to circumvent the prohibition on other written and broadcast offers during the waiting period and thus shift attention away from the balanced prospectus disclosure?

Ostensibly, an issuer could televise or publicize information about an offering during the waiting period to correct an "inadvertent" disclosure of material information as a means to hype the offer without triggering a registration violation. Could the Commission prevent issuers from using Regulation FD to hype the stock?

Foreign private issuers would also be required to comply with Regulation FD. Foreign issuers can now speak to U.S. and foreign journalists overseas about a U.S. and offshore offering during the waiting period under a safe harbor. Regulation FD would result in any material information disclosed overseas being widely disseminated in the United States.

Finally, can the Commission say that opening up analyst calls to all investors -- through the Internet -- would avoid selective disclosure but that an issuer cannot cure a selective disclosure by posting the information on its website?

How will Regulation FD affect public companies when they want to sell securities privately? Will they need to publicize information disclosed privately or is there no material nonpublic disclosure in private offerings?

Because Regulation FD would only apply to ‘34 Act reporting companies, it would not apply to selective disclosures occurring prior to an IPO, including most roadshows.

Roadshows are allowed during the waiting period as long as they are designed to avoid the prohibition against written or broadcast offers made outside of the prospectus. For example, the conditions in the electronic roadshow line of no-action letters are designed to make roadshows more like "oral" offers.

Those conditions limit electronic roadshows to: (1) unedited live presentations,

(2) available for viewing for only a short time, (3) by the audience that traditionally attends live roadshows. The staff has issued six no-action letters so far addressing roadshows for registered offerings broadcast online. In the latest letter, issued to Charles Schwab in November, the staff extended its no-action position to allow a large group of Schwab’s retail investors to view roadshows online.

Opening up roadshows to all investors would be a very positive development for investors with one caveat. If roadshows are to be made widely available to all investors, we should avoid the creation of two roadshows: the regular roadshow where institutional investors can get earnings projections and elicit material information and a sanitized "roadshow lite" for retail investors. Because the staff seems to be at the outer bounds of what we can do about roadshows through the no-action letter process, we may consider these issues in an upcoming release.

The Internet also improves companies’ abilities to communicate with their current and prospective shareholders in other ways. Companies can market themselves to investors through banner ads, cobranding arrangements with other websites, and the investor relations pages on their websites. A June 1999 NIRI survey revealed that almost 90 percent of respondents had an investor relations section on their website, although few believed that these sites resulted in new retail investors.

Issuers need to take special care in what they put on their websites during the prefiling and waiting periods. Some issuers may be surprised to learn that the staff routinely pulls up company websites when reviewing a registration statement to make sure that issuers stick to hyping their products and not their stock.

The Internet also facilitates dissemination of proxy disclosure statements and shareholder proxy voting. Companies in over half the states can now receive electronic proxies from their shareholders, enabling faster quorums and more immediate tallying of shareholder votes, as well as lowering costs for issuers. While voting is primarily a state law issue, we should welcome these developments.

The Internet also provides a ready made forum for investors to communicate easily with one another – within the confines of the Commission’s proxy rules, of course.

Cyberspace and the Commission’s Future Challenges

Looking a bit further down the road, I will touch on some big picture policy questions for the Commission. Cyberspace makes it increasingly impossible to limit the flow of information about an issuer’s offering to what is in the statutory prospectus.

We proposed a massive revision of the ‘33 Act a year ago in our Aircraft Carrier release. The staff has been able to refine the online communications rules only on a modest scale through no action letters. The Commission is continuing to examine how to balance the competing interests that arise in designing communications rules for future generations of offerings.

One of the central issues going forward will be considering the role of the prospectus in an electronic environment. Related to this issue is determining what other "writings" should be allowed around the time of the offering.

The speed and breadth of the Internet raises significant timing issues. Should the Commission speed up prospectus delivery so that investors see it before they invest? With instantaneous information available, will the prospectus continue playing any role in investment decisions?

In the near term, we will consider an upcoming interpretive release addressing, among other topics: 1) how brokers can conduct offerings online, 2) issuers’ and underwriters’ website content during an offering, and 3) how issuers and others can electronically deliver documents during an offering.

A second and even longer term issue, posed by a former Commissioner, is whether we should eventually shift to a system of continuous reporting. Shifting to continuous reporting from the current system of quarterly earnings snapshots in time should tone down the gamesmanship involved in trying to beat the analysts’ earnings expectations for the upcoming quarter.


As you can see, the Internet is potentially the Commission’s greatest ally. It will help us accomplish the cornerstone of the Commission’s approach to regulation – full and fair disclosure. In doing so, it raises many questions about how to accomplish this goal in the technology age. The potentially level informational field also means that the Internet is also significantly changing the dynamics of the marketplace.

Does the Internet signal the beginning of the end of the institutional versus retail market? Or will it just create a market where it is harder to sift through the hype to get to the key facts necessary to make an investment decision? It certainly eliminates technological impediments to the wide dissemination of information to those who have access. However, it doesn’t eliminate vested interests that may want an informational advantage, even for a few seconds. Only regulation can accomplish that.