Speech by SEC Commissioner:
Technology, Capital Markets
and the Digital Divide
by Commissioner Paul R. Carey
U.S. Securities & Exchange Commission
Hellenic Republic Capital Market Commission
Capital Markets Training Program
December 6, 2000
Good evening. It's a pleasure to be here. I have to admit I like the idea of conducting training programs beginning in the afternoon. Usually when I make my remarks, the audience has already sat through 7 or 8 hours of presentations. Here, even though you've only sat for 4 hours, I'll resist taking advantage of you, and will keep my remarks brief. Before I begin, I need to mention that the views I express today are mine alone, and are not meant to reflect the views of the SEC or its staff.
Today, I'd like to share with you how technology is changing the U.S. capital markets, and, in turn, how the SEC is responding. The Internet is providing another vehicle for companies to access the U.S. capital markets by offering them a cheap and efficient way to communicate with potential investors. While everyone agrees that the use of more efficient technology is a good idea, new technologies must be used in a manner consistent with existing regulations, or new regulations must be adopted. In this regard, I'd like to discuss two areas in which technological advances have provided new opportunities for companies to access the capital markets
- Electronic Roadshows, and
- Electronic Offerings
Finally, I'd like to discuss the often overlooked societal costs of technology.
Yesterday, you heard about the "roadshows" that are conducted in the U.S. in which issuers meet with investors in order to create interest in buying their securities. In many ways, roadshows are a peculiar institution company officials and underwriters spend days, even weeks, criss-crossing the country meeting with as many institutions, money managers, and brokerage firms as possible. During this time, they are "building the book" by taking indications of interest to buy the securities. Needless to say, the roadshow circuit can be arduous and expensive.
In comparison, the "electronic roadshow," as it is called, allows companies the opportunity to present their offering to a wider audience over the Internet. Companies, however, must be careful in complying with U.S. federal securities laws that impose significant restrictions on communications that could condition the market for proposed offerings of securities. The main thrust of these laws is that an investor's decision to purchase a security should be made with the benefit of the disclosure in a company's prospectus. U.S. laws provide that no offers, written, broadcast or oral, can be made before an issuer files a prospectus in a registration statement with the SEC. Once the prospectus is filed, oral offers and offers through the prospectus are permitted. Prospectuses that do not satisfy certain disclosure conditions, however, are not allowed.
Traditional roadshows in which company officials meet with investors in person typically involve only oral presentations after the prospectus is filed, and therefore are not illegal. Communications by radio, television, or Internet, in connection with an offering, however, are not considered oral communications, and the issuer must be careful that they do not result in an illegal prospectus. Recognizing this problem, several years ago, issuers and underwriters began requesting that the SEC allow for electronic roadshows.
The SEC typically addresses such issues by adopting new rules or providing interpretive advice. In addition, the staff in various divisions of the SEC have authority to issue what is known as "no-action relief" to persons requesting such action. This relief, in the form of a no-action letter, gives comfort to persons that the SEC will not bring an enforcement action against them based on their intended course of action.
The SEC staff has provided such relief to companies seeking to conduct electronic roadshows. In 1997, the staff issued a no-action letter that allowed the Private Financial Network to broadcast roadshows to its subscribers, primarily brokers and investment advisers. In return, the Private Financial Network agreed to certain conditions that:
- limited the distribution of the broadcast;
- ensured that subscribers received prospectuses before the broadcast; and
- required reasonable steps to ensure that information in the roadshow was not inconsistent with the filed prospectus.
As the staff of the SEC has gained more experience with electronic roadshows, it has loosened the restrictions by expanding the number of qualified viewers, and imposing less restrictive conditions concerning broadcasts. In a pair of letters in November 1999 and February 2000, the staff allowed a broker, Charles Schwab, to make electronic roadshows also available to certain retail investors.
This approach of having the staff provide guidance and gain more experience addressing evolving technologies generally has served the SEC well. Ultimately, I expect that the SEC will propose rules as part of a broader offering communications reform. At that point, the advantages and disadvantages of these proposals will be subject to public comment and SEC review. My utmost concern will be to ensure that electronic roadshows are properly structured to allow companies the greatest access to investors, while ensuring investors receive all the protections they now enjoy under the federal securities laws.
In addition to electronic roadshows, companies and underwriters of securities also have begun to offer securities to investors over the Internet. The SEC staff has responded by issuing a series of no-action letters. In July 1999, the staff issued a no-action letter that allowed Wit Capital, a broker, to offer securities subject to certain conditions, including that:
- a current preliminary prospectus is available on the website;
- investors provide conditional electronic offers to buy securities prior to effectiveness, and these offers to buy are reconfirmed within 48 hours of the date of effectiveness;
- the offer to buy is not binding and the investor may withdraw the offer for a specified period following effectiveness; and
if the pricing is out of the previously specified range, the underwriter will reconfirm the offer to buy.
Since then, the staff has issued no-action letters to Wit Capital, W.R. Hambrecht and Bear Stearns concerning online auction presentations that are used with registered public offerings. These letters allow underwriters to conduct auctions on the Internet after the effective date of the offering, and allow investors to view auctions as they progress.
As with electronic roadshows, the SEC is continuing to analyze whether it needs to provide comprehensive interpretative guidance or adopt new rules concerning electronic offerings. Companies, obviously, would like to see further liberalization of the rules. For the SEC, a central issue will be whether the very nature of evolving technology makes a comprehensive approach unworkable.
More important is the concern that investors are adequately protected. In a recent interpretive release, the SEC stated that retail investors may not fully understand the online offering process, and are being forced to make hasty, and perhaps uninformed investment decisions. Before proceeding any further, we need to make sure that this concern is addressed, for we do not want to see the Internet being used as a method to pressure investors. Given these issues, I believe that the SEC should undertake comprehensive reform in this area.
Finally, I'd like to touch upon the larger issue of whether the promise of new technology is blinding some people to its shortcomings. Many people have stressed the speed at which people are gaining access to the Internet. In fact, people are embracing the Internet much faster than they did the telephone or television, when they were the new technology. In this regard, the Internet has the chance of being not only evolutionary, but also revolutionary. Unlike most investments, it can be said that the Internet has unlimited upside.
While the potential surely is there, it is, at this point, just that. By current estimates, 41 percent of U.S. households now have Internet access. Although a recent U.S. government study found that overall access to the Internet is rapidly increasing, many have observed that some people are being left behind. President Clinton has noted "America continues to face a 'digital divide' a gap between those who have access to Information Age tools and the skills to use them and those who don't."
This digital divide is real. For example, some minority groups in the U.S. have an Internet access rate of approximately 23 percent, which means they lag the national average by 18 percentage points. Although the access rates for these groups generally have increased, in the past two years they have, unfortunately, fell further behind the national average.
Given these disparities, I have done all that I can to make sure that SEC policies do not unfairly discriminate against those who do not have access to the Internet. I believe that every rule that we pass that allows for greater reliance on the Internet to communicate with investors necessarily leaves some investors behind. Therefore, I have insisted that new rules not be interpreted to allow companies and others to forsake the traditional means of communicating to investors who do not have Internet access.
I do believe that someday Internet access will become so universal that issues of access will recede. At this point, however, we must consider the people that are being disadvantaged by decisions that allow for greater reliance on technology. As President Clinton also has observed, "[w]e cannot allow unequal access to deepen divisions along the lines of race, income, education level, and geography." I agree wholeheartedly.
In conclusion, I believe that new technology can empower companies and investors. In many ways, the effective use of technology is the key to maintaining vibrant and competitive capital markets. That being said, I believe we also must embrace new technology with a skeptical mind to ensure that we do not lose touch with our goal of protecting all investors.