August 2, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Attention: Jonathan G. Katz, Secretary
Re: Use of Electronic Media (File No. S7-11-00)
Ladies and Gentlemen:
The Committee on Federal Regulation of Securities of the Business Law Section of the American Bar Association appreciates the opportunity to comment on the Securities and Exchange Commission's recent interpretations regarding the use of electronic media (the "2000 Release").1 These comments have been prepared by members of the Subcommittee on Electronic Communication of the Committee, and a draft of this letter was circulated for comment among members of the Subcommittee and the chairs and vice-chairs of the subcommittees and task forces of the Committee, the officers of the Committee, the members of the Advisory Committee of the Committee and the officers of the Section. This letter generally represents the views of those members of the Committee who have reviewed the letter in draft form. Nonetheless, this letter neither represents the official position of the American Bar Association, the Section or the Committee, nor does it necessarily reflect the views of all those who have reviewed it.
Increased use of the Internet as a means of widespread information dissemination has resulted in uncertainty about and difficulties with the application of the federal securities laws to electronic communications. The 2000 Release is the latest in a series of interpretive releases the Commission has published to address issues raised in the application of the federal securities laws to electronic communications. The Commission's stated purpose in issuing the 2000 Release is to:
While the Commission generally has succeeded in its efforts to provide helpful clarification of the Electronic Delivery Releases, the Committee believes that the Commission's discussion in the 2000 Release of issuer responsibility for hyperlinked information, particularly in an offering context, and other communications during registered offerings and online offerings, public and private, fails to serve the Commission's stated intention to facilitate the use of electronic media for offerings and to encourage more widespread information dissemination. Indeed, issuers and intermediaries may find that the 2000 Release, on balance, suggests more rather than fewer regulatory impediments to the use of electronic media to communicate with investors.
We believe that the Commission, in the 2000 Release and the guidance concerning online offerings and related communications provided by the Division of Corporation Finance (the "Online-Offerings Guidance"),3 has missed an opportunity to recognize the profound changes the electronic-communication revolution has worked in the securities markets and to reform its regulatory scheme to allow investors, issuers and intermediaries to realize the full benefits of timely and cost-effective communication that electronic media offer. Within the existing framework of law and regulation, more is possible.
We therefore respectfully urge the Commission to expand on the 2000 Release to eliminate unnecessary distinctions between traditional and electronic media as used in the securities markets, consistent with the motivating principle behind the Electronic Delivery Releases as well as the approach recently put forward by the Chairman of the Financial Services Authority of the United Kingdom:
[T]he basic raisons d'être of regulation, market confidence and consumer protection, are not changed by new trading systems or delivery mechanisms. If it is right, for example, that an investor should be given certain forms of information, allowed a cooling off period, told what the underlying costs of a transaction are when this is done on paper, then it must be right for a transaction in cyberspace, too. The regulatory delivery system may change, in parallel with the change in investment delivery. But the underlying value system remains the same.4
The Commission has made it clear, first in the Electronic Delivery Releases and now with the 2000 Release, that electronic delivery is an acceptable alternative to paper delivery for virtually all forms of required customer disclosure. While the Electronic Delivery Releases were ground-breaking when issued, the current advanced state of electronic communications technology and the markedly increased customer understanding and acceptance of electronic communications call for a reexamination and modernization of their functional requirements beyond that provided in the 2000 Release. We urge the Commission in expanding on the 2000 Release to consider the capabilities (and limitations) of each electronic medium and to encourage issuers, intermediaries and customers to take full advantage of the cost savings and improved efficiency made possible by the widespread use of electronic communications technology.
Subject to the Electronic Delivery Releases' mandate that electronic delivery result in the delivery of information that is "substantially equivalent" to that which is (or would have been) delivered in paper form, as well as existing disclosure obligations under federal securities laws, we urge the Commission to rework the existing framework of notice, access and evidence of delivery to eliminate any functional distinction between traditional delivery and electronic delivery. We believe that an investor's informed consent to electronic delivery necessarily implies access and, depending on the particular medium used, may also imply notice. No further purpose is served by requiring issuers and intermediaries to prove access and notice as independent requirements across all forms of electronic media. Moreover, while evidence of actual receipt via electronic delivery is a useful alternative to the informed consent requirement, evidence of actual receipt by the investor has never been required for traditional delivery under the federal securities laws, which require only that the information be sent by the issuer or intermediary, thus creating a presumption of receipt upon delivery. Electronic delivery, accompanied by notice where appropriate, should be considered to carry at least the same assurance of delivery as traditional delivery via the postal mail.
As mentioned above, we urge the Commission to adapt the notice requirement to reflect the particular electronic medium used. We see no basis for any distinction between traditional delivery through regular mail and certain modes of electronic delivery, such as e-mail and CD-ROM, that provide notice of the availability of information upon delivery. Accordingly, the notice requirement should be imposed only with respect to materials available solely on an issuer's or intermediary's web site and not delivered through other electronic media. As discussed more fully below, we generally agree with the Commission's view that, when delivery to an investor is required, mere posting of required disclosure on an issuer's or intermediary's Internet web site does not constitute delivery absent some form of notice that the information has been made available. While direct notice via traditional delivery (e.g., phone or postal mail) or electronic delivery immediately preceding or accompanying the posting of materials would certainly be effective, we urge the Commission to recognize under appropriate circumstances, consistent with its acceptance of "global consent" procedures, that "global notice" of the future time and location at which materials will be accessible on a web site should also constitute sufficient notice. Such global notice might consist of prominent disclosure in a customer account agreement, or in a written form of direct notice sent via traditional or electronic means, that periodic reports or proxy statements will be posted according to a specified schedule, that account statements will be posted on a specified day of the month or that confirmations will be posted within a specified number of hours or days after trade execution.
Clear and simple rules adapted specifically to particular forms of electronic media, replacing the existing general framework and numerous examples of permissible procedures, would encourage issuers and intermediaries to make greater use of the various communications technologies. The difficulties associated with complying with the operational requirements of the Electronic Delivery Releases, and now the 2000 Release and the Online-Offerings Guidance, have resulted in low levels of usage and acceptance of electronic delivery by issuers and intermediaries. With respect to trade-confirmation delivery, for example, the practical utility of the Electronic Delivery Releases has been largely illusory. Despite widespread customer demand and the potential for significant cost savings, few brokerage firms offer electronic delivery of customer trade confirmations. Some firms have offered the service as a mere convenience in tandem with traditional paper delivery; other firms have chosen to avoid it entirely.
We support the Commission's interpretive positions relating to telephonic and global consent procedures, but would propose that traditional intermediaries, as well as online-only intermediaries, be permitted to condition account establishment upon customer consent to electronic delivery. We believe the Commission should not interfere with the vigorous competition between traditional intermediaries and online-only intermediaries by requiring only traditional intermediaries to obtain a customer's separate informed consent to electronic delivery and to maintain traditional-delivery options. Such regulatory differentiation between traditional and online-only intermediaries would unfairly (and unnecessarily) impede the entry of traditional intermediaries into online services, particularly when the online services units of such traditional intermediaries often are segregated from the traditional services units and thus operate effectively as online-only intermediaries.
We therefore urge the Commission further to simplify the requirements for electronic delivery to minimize the distinctions between traditional and electronic delivery; to focus on the principles of informed consent and, where appropriate, notice; and to impose no further restrictions on electronic delivery other than the standard content requirements of the securities acts. Finally, we note that the new Electronic Signatures in Global and National Commerce Act5 (the "E-Sign Act") raises issues of interplay with the guidance set forth in the 2000 Release that we trust the Commission will address. We encourage the Commission in finalizing its guidance relating to informed consent to exercise its exemptive authority under section 104(d) of the E-Sign Act to eliminate any unnecessary burdens on electronic delivery in the securities markets.
1. Online Public Offerings
We support the issuance of the most-recent Wit Capital no-action letter6 and the W.R. Hambrecht & Co. no-action letter,7 as the positions stated in them demonstrate the Staff's willingness to adapt prospectus filing requirements to facilitate online auctions. We urge the Commission to approach other forms of online public offerings with this same willingness to adapt its regulatory scheme to recognize the cost and time efficiencies and other benefits that electronic media offer. While we recognize the utility of the previous Wit Capital no-action letter8 and the Online-Offerings Guidance in this regard, we believe that the boundaries of permissible conduct outlined in them are unnecessarily restrictive, given the existing statutory safeguards of section 5 of the Securities Act of 1933 (the "Securities Act"), which continue to provide adequate protection to investors in both traditional and online offerings. Moreover, the Wit Capital and Online-Offerings Guidance procedures are not consistent with customer expectations, as our experience with such procedures suggests that investors are often confused by them.
We urge the Commission to recognize that the restrictions imposed on online distribution through the Wit Capital framework do not achieve parity with traditional offering procedures, but rather can place online distribution firms at a competitive disadvantage relative to their traditional competitors. The Commission has not adequately justified its continued adherence to its distinction between traditional and electronic media. It has not explained how investors solicited via electronic media are placed at greater risk of making "hasty, and perhaps uninformed, investment decisions"9 than investors solicited through traditional means (for example, by telephone or by a mass mailing). Indeed, investors should be better able to consider and research information delivered electronically than over the telephone. Nor has the Commission satisfactorily explained why its concern that investors will not have sufficient information to understand the online-offering process would not be better addressed through the imposition of specific disclosure, rather than cumbersome procedural requirements. We recommend that the Wit Capital framework and Online-Offerings Guidance be reexamined and new guidelines adopted to provide greater flexibility for online securities distributions.
Traditional-offering investors are generally presumed to be aware of the terms of a deal as it evolves and to be sophisticated enough to initiate a cancellation or modification of their conditional offers on their own. The same presumption of awareness and sophistication should be applied to online-offering investors. In fact, because of their ability to receive virtually instantaneous electronic updates (in contrast to the mailing of a revised preliminary prospectus or a telephone call from the traditional intermediary), online investors have a faster and more reliable means of becoming apprised of changes to an offering. We believe that neither traditional nor electronic investors should be burdened with the requirement of affirmative reconfirmation. Investors may be disadvantaged if, because of time zone differences or absences, they are not able to provide reconfirmation. So long as an investor receives full disclosure of the procedure of automatic acceptance of conditional offers upon effectiveness and the anticipated date of effectiveness, and provides informed consent to such procedure, an investor should not be forced to provide affirmative reconfirmation by telephone or e-mail unless some material change in the offering, such as a change in price above the customer's specified price range, has occurred.
Once a preliminary prospectus becomes available, investors should be permitted to place a conditional limit offer with a specified maximum price for the shares being offered. In the event of a change in the anticipated price range or date of effectiveness, investors who have placed conditional offers should be notified of the change and be reminded of their ability to change or cancel their conditional offers until such time as they are notified of their actual allocation of shares. Conditional offers specifying a limit price at or above the revised offering price would remain eligible for an allocation of shares and automatic conversion to firm orders upon effectiveness without requiring affirmative reconfirmation by the customer. Such automatic acceptance could also address the Commission's concerns regarding investor complaints at not receiving shares as anticipated in an online offering.10 Conditional offers specifying a limit price below the revised price would be cancelled unless the customer affirmatively revises the limit price.
If a change in the offering price occurs concurrent with the announcement of an offering's final terms, but outside trading hours, investors should receive notification of the final price. Only conditional limit offers at or above the revised price would remain eligible for an allocation of shares. If a deal price change occurs concurrent with the announcement of an offering's final terms, but within trading hours, and the shares are expected to trade shortly thereafter, investors should not be provided with an opportunity to cancel their conditional offers, provided of course that the customer's limit price was at or above the final offering price. Providing investors with the ability to opt out of an offering that has already begun to trade in the secondary market unfairly subjects the broker-dealer to market risk. Investors should not be permitted to reject the shares based on a price decline in the secondary market.
We also believe that the permissible time period for taking conditional offers should be extended beyond the current seven-day period.11 Broker-dealers should be permitted to take conditional offers as soon as the preliminary prospectus with a bona fide price range is available for posting, generally 2-3 weeks before an offering. The extension of the time period in which customers can place conditional offers affords the customer considerably more convenience, while placing the customer at no greater risk, notwithstanding a greater likelihood of price or effectiveness-date changes. The customer would of course retain the right to cancel or change the conditional limit order at any time prior to actual allocation of shares after effectiveness. The current procedure of automatic expiration of conditional offers after seven days and requirement of affirmative reconfirmation after such expiration provides limited investor protection but considerable added inconvenience and investor uncertainty.
These recommended changes to the Wit Capital framework and the Online-Offerings Guidance strike a fair balance between customer protection and facilitation of the online-offering process. Such changes would benefit the investing public by simplifying (as well as clarifying) the online-offering process and by allowing online distribution firms to expand the process to investors who would otherwise be excluded from traditional distribution channels. We further urge the Commission to resolve any inconsistencies between the current guidance and the electronic commerce consent requirements of the E-Sign Act by exercising the exemptive authority granted under that act to eliminate any additional cumbersome requirements in relation to online securities offerings.
Finally, while we agree with the Commission's position that broker-dealers should maintain their operational capacity during high-volume and high-volatility trading days to ensure proper and timely execution and customer access to online accounts, we believe that market forces provide adequate incentive to broker-dealers to maintain such electronic facilities and that specific procedural requirements need not be imposed by the Commission.
2. Online Private Offerings
We take this opportunity, as a threshold matter, to urge the Commission to eliminate the prohibition of general solicitation and general advertising in connection with a private offering as an unnecessary and unduly burdensome interference with both traditional and online private offerings. So long as such general solicitation or general advertising, by traditional or electronic media, clearly discloses that only accredited or qualified investors would actually be permitted to participate in private offerings (and thereby be exposed to any accompanying risk), and the issuer and intermediary implements appropriate procedures to determine investor accreditation or qualification prior to permitting any investor to participate, the prohibition on solicitation and advertising prior to actual investor participation serves no further purpose. The following discussion is based on existing Regulation D, which contains a prohibition of general solicitation.
We agree with the Commission's position that the determination whether an investor is "accredited" or "sophisticated," for purposes of qualification of an online offering under the existing safe harbor of Regulation D, should be made based upon the investor's responses to appropriate questions, rather than the investor's own self-assessment, and should not reference any particular offering previously posted or to be posted on the web site. In addition, while the IPONET no-action letter12 has been helpful, we urge the Commission to adopt rules explicitly stating that once the determination of accreditation or sophistication is made, restriction of access to an online offering by assignment of passwords is adequate to ensure that the offering meets current Regulation D standards.
While we agree that online service providers whose involvement in transactions in securities (other than the small class of exempt securities) is sufficient to make them "broker-dealers" should be required to register as such, we believe that the Commission should not require broker-dealer registration of online service providers whose involvement is limited.13 We therefore urge the Commission to establish safe-harbor standards permitting third parties not registered as broker-dealers, including third-party online service providers, to conduct certification of investor accreditation, to provide listings of investment opportunities, or to forward an accredited or qualified prospective customer to an online registered broker-dealer actually effecting or participating in negotiating the transaction, without being required to register as broker-dealers. Alternatively, the Commission could establish a simplified, limited broker-dealer registration for intermediaries who perform these limited functions. This would mesh with the regulations of certain states and encourage other states to follow suit. We urge the Commission further to clarify that a "pre-existing, substantive relationship," for purposes of avoiding classification of a solicitation as a general solicitation under current Regulation D standards, may be created by a registered broker-dealer, a third party other than a registered broker-dealer, or by an issuer itself through the process of certification of accredited or qualified status, and that such process need not be artificially segregated from any subsequent solicitation.
Web Site Content
We appreciate the Commission's recognition that the "increased availability of information through the Internet has helped to promote transparency, liquidity and efficiency in our capital markets."14 For issuers and intermediaries making such information available on their own web sites, market forces already provide a powerful incentive to provide links only to independent, value-added third-party web sites. In such circumstances, there are strong policy reasons to absolve those issuers and intermediaries from antifraud responsibilities relating to the content of those third-party sites.
While we appreciate the guidance provided by the Commission's identification of relevant factors (i.e., the context of the hyperlink, the risk of investor confusion, and the presentation of the hyperlinked information) for a determination of issuer liability under the "entanglement" and "adoption" theories, we believe that the Commission can provide a greater measure of certainty than is possible with continued sole reliance on a facts-and-circumstances analytical framework for determining liability for hyperlinked information. Consistent with the Commission's goals of ensuring full and fair disclosure to investors and fostering a well-informed investing public, we urge the Commission to adopt safe-harbor standards, approving certain specific policies and procedures that will encourage issuers and intermediaries to provide easy access to third-party web sites through hyperlinks located outside required disclosure documents and, in the case of municipal issuers, embedded within official statements.15
We encourage the Commission to consider adopting as the foundation of a safe harbor the guidelines provided by NASD Regulation, Inc. ("NASDR") for determining a broker-dealer's responsibility for the content of a third party's web site that is accessible via hyperlink from the broker-dealer's own site.16 Under that standard, a broker-dealer will generally not be held responsible for the content or filing of information contained in a third-party site when the following conditions are met:
NASDR's guidance regarding the use of hyperlinks to third-party web sites should be clarified and expanded by the Commission. Subject to the issuer's or intermediary's satisfaction of the NASDR's basic requirements, we believe that a clear exit notice (or "jump page"), announcing that the hyperlinked information is provided by an independent third party and appearing as an intermediate screen before the hyperlinked information appears, should be the basis of safe harbor protection because it would effectively eliminate investor confusion relating to issuer or intermediary endorsement of hyperlinked information. Likewise, with respect to framing or inlining of hyperlinked information from a third-party web site, a clear notice that announces that the hyperlinked information is provided by an independent third party which appears immediately prior to or prominently along with the hyperlinked information alone should be adequate to eliminate investor confusion and any accompanying issuer or intermediary responsibility for such information. Alternatively, in certain circumstances (such as those involving retail investors), an issuer or intermediary might conclude that an express disavowal of liability for the content of such third-party site is appropriate. We urge the Commission to permit issuers and intermediaries to determine which of the approved safe harbor practices is most appropriate based on their own assessment of the facts and circumstances. Finally, any liability that may result from the failure of an issuer or intermediary to provide such notice should be limited to the information contained in the directly hyperlinked web site, and should not apply to any third-party web sites accessible through hyperlinks on the directly hyperlinked site.
1. Access-Equals-Delivery Model
We believe that the access-equals-delivery model is not appropriate under existing laws and regulations which require actual delivery of a prospectus or other document to an investor, because such a model would effectively shift the issuer's burden of delivery to the investor, who would then be required to take affirmative steps to obtain the information. We do believe, however, that posting of disclosure documents on a web site would constitute effective delivery under certain circumstances, such as among intermediaries. In addition, informed access, where the investor is given notice of the posting, should constitute delivery, at least when the investor has actually or impliedly consented. Furthermore, we urge the Commission to continue to monitor the extent of investor access to and use of the Internet with a view toward reducing or eliminating the present requirement of actual delivery in the future. Where the market operates efficiently, and investor access to the Internet has become sufficiently widespread, the Commission should consider recognizing general dissemination by posting or "mailing" of information rather than actual delivery. Under such circumstances, web-site posting should be sufficient.
2. Electronic Notice
As discussed above, while we believe that some form of notice via traditional or electronic media of the availability of online information is required under existing laws and regulations, we urge the Commission to recognize that effective notice may be accomplished both directly at the time of posting and through "global notice," in a customer account agreement or other written form sent directly to an investor, of the future availability of disclosure documents or account statements on an issuer's or intermediary's web site. We further anticipate that, in an efficient market with widespread investor access to the Internet, simple posting of such notice on a web site will constitute adequate and effective notice.
3. Implied Consent
Consistent with the Commission's emphasis on providing full and fair disclosure under the federal securities laws, and subject to the Commission's requirements for obtaining informed consent described above, we believe that notice of an issuer's or intermediary's intent to deliver required disclosure documents via specified forms of electronic media, in combination with the customer's lack of objection to any of the specified media, is sufficient to constitute consent to electronic delivery. On the same grounds as our position opposed to the requirement of affirmative reconfirmations for online trading, provided that the customer is made aware of his or her right to object to electronic delivery and to opt for regular delivery at any time, we believe the requirement of affirmative consent is an unnecessarily onerous obstacle to full realization of the advantages of electronic media.
We ask the Commission to clarify whether a customer's designation in the customer account agreement of an electronic mail address or facsimile number for delivery of required disclosure documents should constitute implied consent to such delivery. In response to the Commission's concern that customers sometimes change their electronic mail addresses, we note that customers likewise sometimes change their street addresses and telephone numbers. The process for return of undeliverable electronic mail offers the same, if not better, safeguards as similar processes for changed telephone or street addresses.
4. Electronic-Only Offerings
Consistent with the doctrine of informed consent, as described above in relation to electronic delivery, we believe that the paper back-up system should not be required for offerings where participation is conditioned upon consent to electronic-only delivery. We are of course cognizant of the potential technical difficulties in electronic-only offerings; however, we believe that disclosure in the customer account agreement of a potential for delay in delivery or temporary unavailability of documents delivered electronically, in combination with the requisite informed consent and notice where appropriate, should be sufficient investor protection. While an electronic-only issuer should have no duty to maintain the capability of generating a paper copy in the event of a technical breakdown in electronic delivery systems, an electronic-only issuer should of course be permitted to satisfy its delivery requirements by simply downloading and printing a paper copy from the electronic version for delivery via postal mail. In response to the Commission's concern regarding dealer delivery of the prospectus and Exchange Act reports in connection with secondary-market trading, we note that dealers who have obtained the requisite informed consent from their customers also should be permitted to satisfy their delivery requirements electronically or by simply printing copies of the required documents that have been prepared and made available by the issuer electronically if the customer requests traditional delivery.
With respect to the Commission's concern that investors without Internet access would be prevented from participating in electronic-only offerings, given widespread Internet access among the investing public and the importance of preserving customer choice in electing a mode of participation in the securities markets, we do not share the Commission's concern that a two-tiered system would be created. Retail investors would no more likely be excluded from online offerings than traditional offerings. On the contrary, we believe that electronic-only offerings will allow and encourage participation by a broader universe of investors, including many small retail investors currently excluded from traditional offerings, thus represent significant progress towards eradication of the existing two-tiered system in which participation in traditional offerings is limited to institutional and certain preferred customers. Electronic underwriting has already demonstrated its ability to expand retail-investor participation. Investors and issuers with the capability of participating in electronic-only offerings should be permitted to do so, provided that the issuer continues to satisfy all delivery requirements under federal securities laws.
Finally, if an investor participating in an electronic-only offering has previously provided informed consent to the issuer or intermediary for electronic delivery and subsequently revokes such consent, the issuer or intermediary should be permitted to choose whether to refuse such revocation after the customer has purchased securities; to discontinue its agreement with the customer in relation to future transactions; or to charge the customer for the additional expense incurred in preparation and distribution of the required disclosure in paper form via traditional delivery.
5. Access to Historical Information
Antifraud liability relating to materials posted online should be limited to the date the materials were first posted, and an issuer or intermediary does not have a duty to update such materials available on its web site any more than archived materials available in paper form, unless the issuer or intermediary has taken some action to indicate that the information has continued currency. Most posted statements are either dated or the timing of the statement is evident from its content, so that the investor normally has notice of the historical nature of such documents. In certain circumstances issuers or intermediaries might also disclose generally that posted statements should not be assumed to have continuing reliability beyond the date of posting. While specific dating and such cautionary notes are certainly advisable precautions, we are aware of no evidence that investors have been misled by the absence of specific dates or general warnings.
We also urge the Commission to adopt the position that materials posted online will be considered to be read in context with other posted materials on a web site, so that posting of a more recent document discussing the same topic as a historical document should be deemed read along with, and effectively as an update to, the historical information, with no resulting obligation on the part of the issuer or intermediary to revise or remove the historical document. For example, the posting of a subsequent quarterly report should be deemed to update an earlier posted annual report, as is now the case under the EDGAR system.
6. Communications When in Registration
We believe that an issuer that uses or intends to use its web site for both legitimate business and offering activities may maintain communications on its web site relating solely to its business activities while "in registration" without running afoul of its obligations under section 5 of the Securities Act. As a preliminary matter, we ask the Commission in defining when an issuer is "in registration"17 for purposes of determining an issuer's section 5 obligations relating to its web site communications, to distinguish between an issuer's obligations under section 5 relating to its own offering activities and a dealer's obligations during the applicable section 4(3) prospectus-delivery period, during which an issuer that is not itself offering securities should incur no additional section 5 obligations for maintaining communications relating to its business or offering activities on its web site.
In addition, we urge the Commission to adopt safe-harbor standards approving specific practices such as clear notice of the section(s) of the issuer's web site intended specifically for investors or other market participants, the use of similar notices or disclaimers in connection with hyperlinks to intermediary web sites or independent third-party sites discussing the offering, and the use of cul-de-sacs restricting access to, and thereby segregating, communications relating solely to an issuer's offering activities. The Commission should allow issuers flexibility in choosing among such approved practices, any of which would provide adequate investor protection during the offering period(s) for a particular security, regardless whether the issuer conducts a single limited offering, multiple shelf offerings or a continuous offering while maintaining business and offering-related communications on its web site. Such safe-harbor standards also should apply regardless of the timing of the securities offering relative to establishment of the issuer's web site, and regardless whether the issuer has at the time of the offering "established a history" of business communications through its web site.18
We note that, despite the Commission's efforts to encourage companies to post documents on their web sites, the staff on an operational basis in the registration comment process has been taking restrictive positions. For example, the staff has objected to the typical web site format using side columns and banners when the issuer's prospectus or documents incorporated by reference were posted. We believe use of columns and banners is sufficiently widespread and understood to contain separate, unrelated content that their use should not be objectionable. The Commission and its staff should avoid stifling the freedom of issuers to design web sites that work for them.
The adoption of safe harbor standards would encourage issuers conducting online business activities to provide easy access to online materials relating to their offering activities on the same web site used for their ordinary-course business activities. We believe that such procedures would both be consistent with investor protection and facilitate investor research relating to the issuer and thus foster an informed investing public.
7. Internet Discussion Forums
Consistent with our views regarding issuer and intermediary liability for third-party content accessible through hyperlinks on the issuer's or intermediary's web site, we believe that issuers and intermediaries should not be subject to liability for or required to monitor information posted by third parties on electronic discussion forums, chat rooms, or bulletin boards. While it is sound practice to place participants on notice that, as a condition of participating in the discussion forums, participants are not permitted knowingly to make false or misleading statements relating to the issuer or its securities, and that liability for any such statements will not attach to the issuer or intermediary, we do not believe that such disclosure should be mandated, as the context of such electronic forums, in which third-party contributions to the ongoing discussion are generally identified by Internet user names, provides adequate notice distinguishing the third party from the issuer or intermediary. To facilitate Internet discussion forums as an alternative means of broadly disseminating information relating to issuers and encouraging investor participation in actively researching issuers, we believe that the Commission should adopt measures limiting liability under section 10(b) and rule 10b-5 of issuers and intermediaries for participant postings in electronic discussion forums to only those instances in which the issuer or intermediary itself has posted the information.
8. Recognizing Electronic Communication as Oral
We believe the Commission should encourage electronic communication by recognizing that certain forms of electronic communication can qualify as oral statements and therefore can be eligible for the more favorable treatment sometimes afforded oral statements under the federal securities laws. Such treatment includes the ability to communicate orally outside the prospectus once a registration statement for a securities offering has been filed, the ability to communicate orally about a business combination transaction without a filing obligation and the easier method for using the forward-looking statements safe harbor.
We are concerned with the Division of Corporation Finance's position in the Third Supplement to the Manual of Publicly Available Telephone Interpretations19 that an oral electronic communication about a business combination becomes a writing for purposes of Rule 165, therefore triggers the filing requirement of Rule 425, if the electronic communication is available for replay after a live audio or video presentation is completed. It has become customary for companies that hold analyst conference calls to permit the call to be accessed on a delayed basis for some period. Similarly, Internet simulcasts of such calls, which have become increasingly common, also typically can be accessed on a delayed basis. The Division of Corporation Finance's position, by imposing a filing requirement and enhanced liability exposure, will discourage companies from making these electronic communications available on a delayed basis for investors who cannot participate on a real-time basis. The Commission should be encouraging, not discouraging, companies to use these new electronic communication techniques for the benefit of investors generally.
We believe the Commission should address the transmission of roadshows over the Internet. As a preliminary matter, we urge the Commission to state explicitly that electronic transmissions of roadshows, like traditional live roadshows, do not constitute written offers or radio or television broadcast offers subject to section 10 disclosure requirements.20 The Commission should accept electronic roadshows as oral communications subject to the same civil liability limitations as traditional live roadshows.21 We believe that the existing prospectus delivery requirements and liability provisions of the federal securities laws for false or misleading disclosure adequately protect investors so that it is not necessary for the Commission to impose any further restrictions on the content of Internet roadshows provided by issuers, underwriters, or intermediaries.
Regarding investor access to electronic roadshows, we urge the Commission to resolve "the deep tension that exists between its still-paternalistic policy of restricting electronic roadshows and its new initiative in proposed [Regulation] FD that bars selective disclosure in most other contexts,"22 and in so doing to permit issuers, underwriters and intermediaries to realize the full potential of the Internet as a medium for the broad and rapid dissemination of information in the roadshow context. The Commission's concern that a less sophisticated investor will rely solely upon, and be misled by, information conveyed in electronic roadshows and no longer read the prospectus should be addressed under the existing liability provisions of section 10(b) and rule 10b-5, rather than through continued restriction of access to such information based on such factors as net worth and size of investment. In other words, "[t]he cure for reckless half-truths and misstatements is liability, not SEC censorship."23
We therefore believe that the Commission itself should neither restrict nor mandate investor access to electronic roadshows, but should instead allow issuers and their underwriters to respond to market forces in determining the appropriate extent of investor participation in particular offerings. As market forces are already leading certain issuers to lessen or abandon the traditional restrictions on live roadshow access, the Commission should not retard these developments but should leave investors and issuers and their underwriters to reach their desired results.
We believe that the Commission needs to continue actively to foster and encourage the acceptance of advanced technology throughout the securities industry. This will promote the flow of information, improve the quality of investment services offered to the investing public and permit both customers and securities firms to lower their transaction costs, while preserving the principles of investor protection and informed choice.
Chair, Committee on Federal Regulation of Securities
Sam Scott Miller, Chair
|1||Use of Electronic Media, Exchange Act Release No. 42728 (April 28, 2000), 65 Fed. Reg. 25843 (May 4, 2000).|
|2||Use of Electronic Media for Delivery Purposes, Exchange Act Release No. 36345 (October 6, 1995), 60 Fed. Reg. 53458 (Oct. 13, 1995) and Use of Electronic Media by Broker-Dealers, Transfer Agents and Investment Advisers for Delivery of Information, Exchange Act Release No. 37182 (May 9, 1996), 61 Fed. Reg. 24644 (May 15, 1996).|
|3||Current Issues and Rulemaking Projects of the Division of Corporation Finance, http:// www.sec.gov/worddocs/cfcr042k.doc, section VIII.A.5 (June 16, 2000).|
|4||Howard Davies, Global Markets, Global Regulation, Address Before the International Organization of Securities Commissions Annual Conference (May 17, 2000).|
|5||Pub. L. No. 106-229, 114 Stat. 464 (2000).|
|6||Wit Capital Corp., 2000 SEC No-Act. LEXIS 749 (July 20, 2000).|
|7||W.R. Hambrecht & Co., 2000 SEC No-Act. LEXIS 737 (July 12, 2000).|
|8||Wit Capital Corp., SEC No-Action Letter, [1999 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 77,577, at 78,906 (July 14, 1999).|
|9||2000 Release, section II.C.1.|
|10||See 2000 Release, section I.C.1.|
|11||See Online-Offerings Guidance, pp. 34-35.|
|12||IPONET, SEC No-Action Letter, [1996-1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 77,252, at 77,270 (July 26, 1996).|
|13||See, for example, Venture Listing Services, Inc., 1994 SEC No-Act LEXIS 597 (June 15, 1994).|
|14||2000 Release, section I.|
|15||While we agree with the Commission, with respect to registered securities offerings, that third-party web sites accessible through hyperlinks embedded within required disclosure documents should normally be deemed incorporated within such documents, and therefore not subject to the proposed safe harbor standards, we urge the Commission to distinguish in this regard municipal offerings exempt from registration and subject only to antifraud liability under the securities acts. Because municipal issuers commonly include references to third-party materials in official statements for the benefit of investors, and often cannot independently verify such third-party materials due to limited resources, we believe the proposed safe-harbor standards should allow municipal issuers to embed hyperlinks to third-party web sites within official statements without being deemed to have incorporated such information within those required disclosure documents.|
|16||See NASDR letter from Thomas M. Selman to the Investment Company Institute, November 11, 1997.|
|17||2000 Release, n. 10.|
|18||2000 Release, section II.B.2.|
|19||http://www.sec.gov/offices/corpfin/phonits3.htm (July 2000).|
|20||See Charles Schwab & Co., Inc., SEC No-Action Letter, [1999-2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 77,650, at 76,310 (Nov. 15, 1999), though, given the clarification provided in the subsequent Schwab no-action letter, Charles Schwab & Co., Inc., SEC No-Action Letter, [Current Binder] Fed. Sec. L. Rep. (CCH) ¶ 77,814, at 76,683 (Feb. 9, 2000), such position is currently of limited practical utility.|
|21||See the discussion in the preceding section regarding the importance of recognizing that oral electronic transmissions retain their oral nature even though subject to delayed access.|
|22||John C. Coffee, Jr., Securities Law: Electronic Media, Nat'l L.J., July 3, 2000, at B6.|