Use of Electronic Media
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 231, 241 and 271
[Release Nos. 33-7856, 34-42728, IC-24426; File No. S7-11-00]
Use of Electronic Media
AGENCY: Securities and Exchange Commission.
ACTION: Interpretation; Solicitation of Comment.
SUMMARY: We are publishing guidance on the use of electronic media by issuers of all types, including operating companies, investment companies and municipal securities issuers, as well as market intermediaries. The guidance addresses the use of electronic media in three areas. First, we update our previous guidance on the use of electronic media to deliver documents under the federal securities laws. Second, we discuss an issuer's liability for web site content. Third, we outline basic legal principles that issuers and market intermediaries should consider in conducting online offerings. Additionally, because technology is evolving rapidly, we seek comment on a number of issues to assist us in determining whether further regulatory action is necessary.
DATES: Effective Date: The interpretations are effective on May 4, 2000. Comment Date: Comments should be submitted on or before June 19, 2000.
ADDRESSES: You should submit three copies of your comments to Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. You also may submit your comments electronically to the following electronic mail address: firstname.lastname@example.org. All comment letters should refer to File Number S7-11-00; please include this file number in the subject line if you use electronic mail. Comment letters will be available for inspection and copying at the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. We will post electronically submitted comment letters on our Internet web site <http://www.sec.gov>.1
FOR FURTHER INFORMATION CONTACT: P.J. Himelfarb and Mark A. Borges in the Office of Chief Counsel, Division of Corporation Finance, at (202) 942-2900. For questions regarding broker-dealers (including municipal securities dealers), please contact Paula R. Jenson, Deputy Chief Counsel, and Laura S. Pruitt in the Office of Chief Counsel, Division of Market Regulation, at (202) 942-0073. For questions regarding broker-dealer capacity, please contact Irene A. Halpin and Joan M. Collopy in the Office of Risk Management and Control, Division of Market Regulation, at (202) 942-0772. For questions regarding investment companies and investment advisers, please contact Alison M. Fuller, Assistant Chief Counsel, and David W. Grim in the Office of Chief Counsel, Division of Investment Management, at (202) 942-0659.
Table of Contents
II. Interpretive Guidance
A. Electronic Delivery
1. Telephonic Consent
2. Global Consent
3. Use of Portable Document Format
4. Clarification of the "Envelope Theory"
B. Web Site Content
1. Issuer Responsibility
a. Context of the Hyperlink
b. Risk of Confusion
c. Presentation of the Hyperlinked Information
2. Issuer Communications During a Registered Offering
C. Online Offerings
1. Online Public Offerings
2. Online Priveate Offerings under Regulation D
3. Broker-Dealer Capacity
D. Technology Concepts
1. Access Equals Delivery
2. Electronic Notice
3. Implied Consent
4. Electronic-Only Offerings
5. Access to Historical Information
6. Communications When In Registration
7. Internet Discussions Forums
III. Solicitation of Comment
By facilitating rapid and widespread information dissemination, the Internet has had a significant impact on capital-raising techniques and, more broadly, on the structure of the securities industry. Today, almost seven million people invest in the U.S. securities markets through online brokerage accounts.2 To serve this increasing interest in online trading, there has been a surge in online brokerage firms offering an array of financial services.3 Additionally, many publicly traded companies are incorporating Internet-based technology into their routine business operations, including setting up their own web sites to furnish company and industry information. Some provide information about their securities and the markets in which their securities trade. Investment companies use the Internet to provide investors with fund-related information, as well as shareholder services and educational materials. Issuers of municipal securities also are beginning to use the Internet to provide information about themselves and their outstanding bonds, as well as new offerings of their securities. The increased availability of information through the Internet has helped to promote transparency, liquidity and efficiency in our capital markets.
This release is designed to provide guidance to issuers of all types, including operating companies, investment companies and municipal securities issuers, as well as market intermediaries, on several issues involving the application of the federal securities laws to electronic media. In developing this guidance, we considered the significant benefits that investors can gain from the increased use of electronic media. We also considered the potential for electronic media, as instruments of inexpensive, mass communication, to be used to defraud the investing public.4 We believe that the guidance advances our central statutory goals: ensuring full and fair disclosure to investors; promoting the public interest, including investor protection, efficiency, competition and capital formation; and maintaining fair and orderly markets.
One of the key benefits of electronic media is that information can be disseminated to investors and the financial markets rapidly and in a cost-effective and widespread manner. Our recently adopted rules permitting increased communications with security holders and the markets in connection with business combinations and similar transactions should enable issuers to take further advantage of this benefit.5 Thus far, we have not extended the same flexible treatment to securities offerings aimed at raising capital. For these offerings, we are considering separately the liberalization of communications by issuers and other market participants.6
Today's interpretive guidance will do the following:
- Facilitate electronic delivery of communications by
- investors may consent to electronic delivery telephonically;
- intermediaries may request consent to electronic delivery on a "global," multiple-issuer basis;
- issuers and intermediaries may deliver documents in portable document format, or PDF, with appropriate measures to assure that investors can easily access the documents;
- an embedded hyperlink7 within a Section 10 prospectus8 or any other document required to be filed or delivered under the federal securities laws causes the hyperlinked information to be a part of that document;
- the close proximity of information on a web site to a Section 10 prospectus does not, by itself, make that information an "offer to sell," "offer for sale" or "offer" within
the meaning of Section 2(a)(3) of the Securities Act9; and
- municipal securities underwriters may rely on a municipal securities issuer to identify the documents on the issuer's web site that comprise the preliminary, deemed final and final official statements.
- Reduce uncertainty regarding permissible web site
content to encourage more widespread information dissemination to all
investors by clarifying
- some of the facts and circumstances that may result in an issuer having adopted information on a third-party web site to which the issuer has established a hyperlink for purposes of the anti-fraud provisions of the federal securities laws; and
- general legal principles that govern permissible web site communications by issuers when in registration.10
- Facilitate online offerings by clarifying
- general legal principles that broker-dealers should consider when developing and implementing procedures for online public offerings; and
- circumstances under which a third-party service provider may establish a web site to facilitate online private offerings.
II. Interpretive Guidance
A. Electronic Delivery
We first published our views on the use of electronic media to deliver information to investors in 1995.11 The 1995 Release focused on electronic delivery of prospectuses, annual reports to security holders and proxy solicitation materials under the Securities Act of 1933,12 the Securities Exchange Act of 193413 and the Investment Company Act of 1940.14 Our 1996 electronic media release15 focused on electronic delivery of required information by broker-dealers (including municipal securities dealers) and transfer agents under the Exchange Act and investment advisers under the Investment Advisers Act of 1940.16
We believe that the framework for electronic delivery established in these releases continues to work well in today's technological environment. Issuers and market intermediaries therefore must continue to assess their compliance with legal requirements in terms of the three areas identified in the releases -- notice, access and evidence of delivery. Although we believe that this framework continues to be appropriate, we provide below guidance that will clarify some regulatory issues relating to electronic delivery.17
1. Telephonic Consent
As noted above, one of the three elements of satisfactory electronic delivery is obtaining evidence of delivery. The 1995 Release provided that one method for satisfying the evidence-of-delivery element is to obtain an informed consent from an investor to receive information through a particular electronic medium.18 The 1996 Release stated that informed consent should be made by written or electronic means.19 Some securities lawyers have concluded that, based on the 1996 Release, telephonic consent generally is not permitted. Others have opined that telephonic consent may be permissible if an issuer or intermediary retains a record of the consent.20
In today's markets, where speed is a priority, significant matters often are communicated telephonically. It is common (and increasingly popular), for instance, for security holders to vote proxies and even transfer assets over the telephone where permitted under applicable state law.21 In addition, investors can place orders to trade securities over the telephone. We believe these practices have developed because business can be transacted as effectively over the telephone today as it can in paper. We are of the view, therefore, that an issuer or market intermediary may obtain an informed consent telephonically, as long as a record of that consent is retained.22 As with written or electronic consent, telephonic consent must be obtained in a manner that assures its authenticity.23
2. Global Consent
The 1995 Release stated that consent to electronic delivery could relate to all documents to be delivered by or on behalf of a single issuer.24 The 1995 Release also stated that an issuer could rely on consent obtained by a broker-dealer or other market intermediary.25 Some securities lawyers have questioned the permissible scope of consents that are obtained by broker-dealers or banks (or their agents) from investors who hold securities of multiple issuers in their brokerage, trust or other accounts. Specifically, they have asked whether an investor can consent to electronic delivery of all documents of any issuer in which that investor buys or owns securities through a particular intermediary.
We believe that an investor may give a global consent to electronic delivery -- relating to all documents of any issuer -- so long as the consent is informed.26 Given the broad scope of a global consent and its effect on an investor's ability to receive important documents, we believe intermediaries should take particular care to ensure that the investor understands that he or she is providing a global consent to electronic delivery. For example, a global consent that is merely a provision of an agreement that an investor is required to execute to receive other services may not fully inform the investor. To best inform investors, broker-dealers could obtain consent from a new customer through an account-opening agreement that contains a separate section with a separate electronic delivery authorization, or through a separate document altogether. We believe that a global consent to electronic delivery would not be an informed consent if the opening of a brokerage account were conditioned upon providing the consent.27 Therefore, absent other evidence of delivery,28 we believe that if the opening of an account were conditioned upon providing a global consent, evidence of delivery would not be established.
Similarly, because of the broad scope of a global consent, an investor should be advised of his or her right to revoke the consent at any time and receive all covered documents in paper format. We recognize that a system allowing an investor to revoke consent to electronic delivery with respect to some issuers' documents, but not others, may be difficult to administer. An intermediary might be uncertain about whether or not it has complied with its delivery obligations. Thus, intermediaries, if they wish, may require revocation on an "all-or-none" basis, provided that this policy is adequately disclosed when the consent is obtained.
As noted in the 1995 Release, an informed consent must specify the type of electronic media to be used (for example, a limited proprietary system or an Internet web site).29 This is particularly true for global consents where multiple documents may be delivered through different media. An investor should not be disadvantaged by inadvertently consenting to electronic delivery through a medium that is not compatible with the investor's computer hardware and software.30
Although a global consent must identify the various types of electronic media that may be used to constitute an informed consent, it need not specify the medium to be used by any particular issuer. Additionally, the consent need not identify the issuers covered by the consent. If the consent does identify the covered issuers, it also may provide that additional issuers can be added at a later time without further consent. Investors cannot be required to accept delivery via additional media at a later time without further informed consent.31
3. Use of Portable Document Format
The 1995 Release stated that "the use of a particular medium should not be so burdensome that intended recipients cannot effectively access the information provided."32 Many issuers have interpreted this statement to preclude delivery of PDF documents which cannot be accessed without special software. Instead, those issuers use hypertext markup language, or HTML, which may be viewed without the need for additional software.33 We believe that issuers and market intermediaries delivering documents electronically may use PDF if it is not so burdensome as effectively to prevent access. For example, PDF could be used if issuers and intermediaries
- inform investors of the requirements necessary to
download PDF when obtaining consent to electronic delivery; and
- provide investors with any necessary software and technical assistance at no cost.34
4. Clarification of the "Envelope Theory"
The 1995 Release provided a number of examples designed to assist issuers and market intermediaries in meeting their delivery obligations through electronic media. One example provided that documents in close proximity on the same web site menu are considered delivered together.35 Other examples confirmed the proposition that documents hyperlinked to each other are considered delivered together as if they were in the same paper envelope.36 The premise underlying these examples has come to be called the "envelope theory."
The purpose of these examples was to provide assurance to issuers and intermediaries that they are delivering multiple documents simultaneously to investors when so required by the federal securities laws. For example, in a registered offering, sales literature cannot be delivered to an investor unless the registration statement has been declared effective and a final prospectus accompanies or precedes the sales literature.37 It is easy to establish concurrent delivery when multiple documents are included in one paper envelope that is delivered by U.S. postal mail or a private delivery service. When electronic delivery is used, however, it is somewhat more difficult to establish whether multiple documents may be considered delivered together. The guidance provided in the 1995 Release about the use of "virtual" envelopes was intended to alleviate this difficulty.
Nevertheless, some issuers and intermediaries believe that the envelope theory has created ambiguities as to appropriate web site content when an issuer is in registration.38 Some securities lawyers have expressed concern that if a Section 10 prospectus is posted on a web site, the operation of the envelope theory causes everything on the web site to become part of that prospectus. They also have raised concerns that information on a web site that is outside of the four corners of the Section 10 prospectus, but in close proximity39 to it, would be considered free writing.40
Information on a web site would be part of a Section 10 prospectus only if an issuer (or person acting on behalf of the issuer, including an intermediary with delivery obligations) acts to make it part of the prospectus. For example, if an issuer includes a hyperlink within a Section 10 prospectus, the hyperlinked information would become a part of that prospectus.41 When embedded hyperlinks are used,42 the hyperlinked information must be filed as part of the prospectus in the effective registration statement and will be subject to liability under Section 11 of the Securities Act.43 In contrast, a hyperlink from an external document to a Section 10 prospectus would result in both documents being delivered together, but would not result in the non-prospectus document being deemed part of the prospectus. Issuers nevertheless may be subject to liability under Section 12 of the Securities Act44 for the external document depending on whether the external document is itself a prospectus or part of one.
With respect to the free writing concern, the focus on the location of the posted prospectus is misplaced. Regardless of whether or where the Section 10 prospectus is posted, the web site content must be reviewed in its entirety to determine whether it contains impermissible free writing.45 The Commission staff will continue to raise questions about information on an issuer's web site that is either inconsistent with the issuer's Section 10 prospectus or that would constitute an "offer to sell," "offer for sale" or "offer" under Section 2(a)(3) of the Securities Act.
Municipal securities market participants involved in offering and selling municipal securities face similar issues under Exchange Act Rule 15c2-1246 in connection with their use of electronic media. Rule 15c2-12 requires municipal securities underwriters of primary offerings to, among other things,
- obtain and review an official statement that the municipal securities issuer deems final;
- send the final official statement to any potential customer; and
- in negotiated sales, send the most recent preliminary
official statement, if one exists, to any potential customer.
Under Rule 15c2-12, a final official statement can be a single document or set of documents. In a municipal securities offering, if a municipal securities issuer puts its official statement on its web site and also establishes hyperlinks to other web sites, a question arises as to what constitutes the final official statement that a municipal securities underwriter has an obligation to obtain and send to potential customers. For purposes of satisfying its obligations under Rule 15c2-12, a municipal securities underwriter may rely on the municipal securities issuer to identify which of the documents on, or hyperlinked from, the issuer's web site comprise the preliminary, deemed final and final official statements, even if the issuer's web site contains other documents or hyperlinks to other web sites. Hyperlinks embedded within an official statement itself, however, will be considered part of the official statement, even if a municipal securities issuer has not specifically identified the embedded hyperlinked information. For any municipal securities offering subject to Rule 15c2-12, the paper and electronic versions of each of the preliminary, deemed final and final official statements must be the same. Municipal securities issuers are reminded that, whether or not the offering of their securities is exempt from Rule 15c2-12, the anti-fraud provisions of the federal securities laws apply to their official statements and other disclosures.47
B. Web Site Content
Issuers have raised a number of questions about their responsibility for the content of their web sites, both when they are in registration and when they are not. It is important for issuers, including municipal securities issuers, to keep in mind that the federal securities laws apply in the same manner to the content of their web sites as to any other statements made by or attributable to them. While many of these questions may be resolved by reference to current law, we recognize that further guidance would be helpful on two fundamental issues affecting web site content. We first consider issuer responsibility for hyperlinked information under the anti-fraud provisions of the federal securities laws. We then discuss the regulation of issuers' web site communications during registered offerings.
1. Issuer Responsibility for Hyperlinked Information
Issuers48 are responsible for the accuracy of their statements that reasonably can be expected to reach investors or the securities markets49 regardless of the medium through which the statements are made, including the Internet. Some issuers have asked whether they can be held liable under Section 10(b) of the Exchange Act and Rule 10b-5 for third-party information to which they have hyperlinked from their web sites.50 This concern stems largely from case law51 and our findings in the 1997 settlement of an enforcement action.52 These questions focus on the consequences of issuer hyperlinks to analyst research reports, although issuers also have expressed concern about their potential liability for hyperlinks to other information as well.
Whether third-party information is attributable to an issuer depends upon whether the issuer has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information. In the case of issuer liability for statements by third parties such as analysts, the courts and we have referred to the first line of inquiry as the "entanglement" theory and the second as the "adoption" theory.
In the case of hyperlinked information, liability under the "entanglement" theory would depend upon an issuer's level of pre-publication involvement in the preparation of the information.53 In contrast, liability under the "adoption" theory would depend upon whether, after its publication, an issuer, explicitly or implicitly, endorses or approves the hyperlinked information.54
Below we discuss factors that we believe are relevant in deciding whether an issuer has adopted information on a third-party web site to which it has established a hyperlink.55 While the factors we discuss below form a useful framework of analysis, we caution that they are neither exclusive nor exhaustive. We are not establishing a "bright line" mechanical test. We do not mean to suggest that any single factor, standing alone, would or would not dictate the outcome of the analysis.
a. Context of the Hyperlink
Whether third-party information to which an issuer has established a hyperlink is attributable to the issuer is likely to be influenced by what the issuer says about the hyperlink or what is implied by the context in which the issuer places the hyperlink. An issuer might explicitly endorse the hyperlinked information. For example, a hyperlink might be incorporated in or accompany a statement such as "XYZ's web site contains the best description of our business that is currently available." Likewise, a hyperlink might be used to suggest that the hyperlinked information supports a particular assertion on an issuer's web site. For example, the hyperlink may be incorporated in or accompany a statement such as, "As reported in Today's Widget, our company is the leading producer of widgets worldwide." Moreover, even when an issuer remains silent about the hyperlink, the context nevertheless may imply that the hyperlinked information is attributable to the issuer.56
In the context of a document required to be filed or delivered under the federal securities laws, we believe that when an issuer embeds a hyperlink to a web site within the document, the issuer should always be deemed to be adopting the hyperlinked information.57 In addition, when an issuer is in registration, if the issuer establishes a hyperlink (that is not embedded within a disclosure document) from its web site to information that meets the definition of an "offer to sell," "offer for sale" or "offer" under Section 2(a)(3) of the Securities Act, a strong inference arises that the issuer has adopted that information for purposes of Section 10(b) of the Exchange Act and Rule 10b-5.58
b. Risk of Confusion
Another factor we would consider in determining whether an issuer has adopted hyperlinked information is the presence or absence of precautions against investor confusion about the source of the information. Hyperlinked information on a third-party web site may be less likely to be attributed to an issuer if the issuer makes the information accessible only after a visitor to its web site has been presented with an intermediate screen that clearly and prominently indicates that the visitor is leaving the issuer's web site and that the information subsequently viewed is not the issuer's. Similarly, there may be less likelihood of confusion about whether an issuer has adopted hyperlinked information if the issuer ensures that access to the information is preceded or accompanied by a clear and prominent statement from the issuer disclaiming responsibility for, or endorsement of, the information. In contrast, the risk of investor confusion is higher when information on a third-party web site is framed59 or inlined.60 We are not suggesting, however, that statements and disclaimers will insulate an issuer from liability for hyperlinked information when the relevant facts and circumstances otherwise indicate that the issuer has adopted the information.61
c. Presentation of the Hyperlinked Information
The presentation of the hyperlinked information by an issuer is relevant in determining whether the issuer has adopted the information. For example, an issuer's efforts to direct an investor's attention to particular information by selectively providing hyperlinks is a relevant consideration in determining whether the information so hyperlinked has been adopted by the issuer. Where a wealth of information as to a particular matter is available, and where the information accessed by the hyperlink is not representative of the available information, an issuer's creation and maintenance of the hyperlink could be an endorsement of the selected information. Similarly, an issuer that selectively establishes and terminates hyperlinks to third-party web sites depending upon the nature of the information about the issuer on a particular site or sites may be viewed as attempting to control the flow of information to investors. Again, this suggests that the issuer has adopted the information during the periods that the hyperlink is operative.
Finally, the layout of the screen containing a hyperlink is relevant in determining whether an issuer will be deemed to have adopted hyperlinked information. Any action to differentiate a particular hyperlink from other hyperlinks on an issuer's web site, through its prominence, size or location, or to draw an investor's attention to the hyperlink, may suggest that the issuer favors the hyperlinked information over other information available to the investor on or through the site. For example, a particular hyperlink might be presented in a different color, type font or size from other hyperlinks on an issuer's web site. Where the method of presenting the hyperlink influences disproportionately an investor's decision to view third-party information, the hyperlinked information is more likely attributable to an issuer.
2. Issuer Communications During
a Registered Offering
Because of the increasing use by issuers of web sites to
communicate in the ordinary course of business with their security holders,
customers, suppliers and others, issuers have asked us for guidance on the
permissible content of their Internet communications when they are in
registration.62 An issuer in
registration must consider the application of Section 5 of the Securities
Act63 to all of its
communications with the public.64 In
our view, this includes information on an issuer's web site as well as
information on a third-party web site to which the issuer has established a
hyperlink. The Securities Act and accompanying regulations currently limit
information about an offering that issuers and persons acting on their behalf
may provide to investors to the content of the Section 10 prospectus and any
permissible communications under available Securities Act safe harbors.65 Thus, information on a third-party web
site to which an issuer has established a hyperlink that meets the definition of
an "offer to sell," "offer for sale" or "offer" under Section 2(a)(3) of the
Securities Act raises a strong inference that the hyperlinked information is
attributable to the issuer for purposes of a Section 5 analysis.66 To ensure compliance with Section 5, an
issuer in registration should carefully review its web site and any information
on third-party web sites to which it hyperlinks.
An issuer that is in registration should maintain
communications with the public as long as the subject matter of the
communications is limited to ordinary-course business and financial information,
which may include the following:
- advertisements concerning the issuer's products and
- Exchange Act reports required to be filed with the
- proxy statements, annual reports to security holders
and dividend notices;
- press announcements concerning business and financial
- answers to unsolicited telephone inquiries concerning
business matters from securities analysts, financial analysts, security
holders and participants in the communications field who have a legitimate
interest in the issuer's affairs; and
- security holders' meetings and responses to security
holder inquiries relating to these matters.67
Statements containing information falling within any of
the foregoing categories, or an available Securities Act safe harbor,68 may be posted on an issuer's web site
when in registration, either directly or indirectly through a hyperlink to a
third-party web site, including the web site of a broker-dealer that is
participating in the registered offering.
Although our original guidance was directed at
communications by reporting issuers when in registration, it also should be
observed by non-reporting issuers preparing to offer securities to the public
for the first time. A non-reporting issuer that has established a history of
ordinary course business communications through its web site should be able to
continue to provide business and financial information on its site consistent
with our original guidance. A non-reporting issuer preparing for its first
registered public offering that contemporaneously establishes a web site,
however, may need to apply this guidance more strictly when evaluating its web
site content because it may not have established a history of ordinary-course
business communications with the marketplace. Thus, its web site content may
condition the market for the offering and, due to the unfamiliarity of the
marketplace with the issuer or its business, investors may be unable to view the
issuer's communications in an appropriate context while the issuer is in
registration. In other words, investors may be less able to distinguish offers
to sell an issuer's securities in a registered offering from product or service
promotional activities or other business or financial information.
C. Online Offerings
1. Online Public
Increasingly, issuers and broker-dealers are conducting
public securities offerings online, using the Internet, electronic mail and
other electronic media to solicit prospective investors. Examples of these
electronic communications include investor questionnaires on investment
qualifications, broker-dealer account-opening procedures and directives on how
to submit indications of interest or offers to buy in the context of a specific
public offering.69 These developments
present both potential benefits and dangers to investors.70 On the positive side, numerous "online
brokers" appear to have begun to give individual investors more access to public
offerings, including initial public offerings, or IPOs.71 Still, dangers accompany these expanded
online investment opportunities. Retail investors often are unfamiliar with the
public offering process generally, and, in particular, with new marketing
practices that have evolved in connection with online public offerings. We are
concerned that there may be insufficient information available to investors to
enable them to understand fully the online public offering process. We also are
concerned that investors are being solicited to make hasty, and perhaps
uninformed, investment decisions.72
Two fundamental legal principles should guide issuers,
underwriters and other offering participants in online public offerings. First,
offering participants can neither sell, nor make contracts to sell, a security
before effectiveness of the related Securities Act registration statement.73 A corollary to this principle dictates
that "[n]o offer to buy ... can be accepted and no part of the purchase price
can be received until the registration statement has become effective."74
Second, until delivery of the final prospectus has been
completed, written offers and offers transmitted by radio and television cannot
be made outside of a Section 10 prospectus except in connection with business
combinations.75 After filing the
registration statement, two limited exceptions provide some flexibility to
offering participants to publish notices of the offering.76 Following effectiveness, offering
participants may disseminate sales literature and other writings so long as
these materials are accompanied or preceded by a final prospectus.77 Oral offers, in contrast, are
permissible as soon as the registration statement has been filed. Offering
participants may use any combination of electronic and more traditional media,
such as paper or the telephone, to communicate with prospective investors,
provided that use of these media is in compliance with the Securities Act.
These key legal principles must underpin the development
of appropriate procedures for online offerings. To date, the Division of
Corporation Finance has reviewed numerous procedures in connection with online
distributions of IPOs. The Division also has issued a no-action letter regarding
permissible procedures for the use of the Internet in IPOs.78 We understand, however, that a number
of online brokers have urged that we make additional regulatory accommodations
to facilitate online offerings. We appreciate the benefits that technology
brings to the offering process and fully support the need to craft a regulatory
system that maximizes these benefits. We also are mindful of our investor
protection mandate and the fundamental principles established by the Securities
Act for the offer and sale of securities. Many of the procedures urged upon us
by online brokers may be properly the subject of regulatory action. Accordingly,
in this release, we do not prescribe any specific procedures that must be
followed. Instead, we will continue to analyze this area as practice, procedures
and technology evolve, with a view to possible regulatory action in the future.
Additionally, the Commission staff will continue to review procedures submitted
in connection with online offerings.
2. Online Private Offerings
under Regulation D
Broad use of the Internet for exempt securities
offerings under Regulation D is problematic because of the requirement that
these offerings not involve a general solicitation or advertising.79 When we first considered whether exempt
offerings could be conducted over the Internet, we concluded that an issuer's
unrestricted, and therefore publicly available,
Internet web site would not be consistent with the restriction on general
solicitation and advertising. Specifically, the 1995 Release included an example
indicating that an issuer's use of an Internet web site in connection with a
purported private offering would constitute a "general solicitation" and
therefore disqualify the offering as "private."80
Subsequently, the Divisions of Corporation Finance and
Market Regulation issued interpretive guidance to a registered broker-dealer and
its affiliate, IPONET,81
that planned to invite previously unknown prospective investors to complete a
questionnaire posted on the affiliate's Internet web site "as a means of
building a customer base and database of accredited and sophisticated investors"
for the broker-dealer.82 A
password-restricted web page permitting access to private offerings would become
available to a prospective investor only after the affiliated broker-dealer
determined that the investor was "accredited" or "sophisticated" within the
meaning of Regulation D.83
Additionally, a prospective investor could purchase securities only in offerings
that were posted on the restricted web site after
the investor had been qualified by the affiliated broker-dealer as an accredited
or sophisticated investor and had opened an account with the broker-dealer. The
Divisions' interpretive letter was based on an important and well-known
principle established over a decade ago: a general solicitation is not present
when there is a pre-existing, substantive relationship between an issuer, or its
broker-dealer, and the offerees.84
We understand that some entities have engaged in
practices that deviate substantially from the facts in the IPONET interpretive letter. Specifically, third-party
service providers who are neither registered broker-dealers nor affiliated with
registered broker-dealers have established web sites that generally invite
prospective investors to qualify as accredited or sophisticated as a prelude to
participation, on an access-restricted basis, in limited or private offerings
transmitted on those web sites. Moreover, some non-broker-dealer web site
operators are not even requiring prospective investors to complete
questionnaires providing information needed to form a reasonable belief
regarding their accreditation or sophistication. Instead, these web sites permit
interested persons to certify themselves as accredited or sophisticated merely
by checking a box.
These web sites, particularly those allowing for
self-accreditation, raise significant concerns as to whether the offerings that
they facilitate involve general solicitations.85 In these instances, one method of
ensuring that a general solicitation is not involved is to establish the
existence of a "pre-existing, substantive relationship."86 Generally, staff interpretations of
whether a "pre-existing, substantive relationship" exists have been limited to
procedures established by broker-dealers in connection with their customers.
This is because traditional broker-dealer relationships require that a
broker-dealer deal fairly with, and make suitable recommendations to, customers,
and, thus, implies that a substantive relationship exists between the
broker-dealer and its customers. We have long stated, however, that the presence
or absence of a general solicitation is always dependent on the facts and
circumstances of each particular case.87 Thus, there may be facts and
circumstances in which a third party, other than a registered broker-dealer,
could establish a "pre-existing, substantive relationship" sufficient to avoid a
Notwithstanding the analysis for purposes of Section 5
of the Securities Act, web site operators need to consider whether the
activities that they are undertaking require them to register as broker-dealers.
Section 15 of the Exchange Act89
essentially makes it unlawful for a broker or dealer "to effect any transactions
in, or to induce or attempt to induce the purchase or sale of, any security
(other than an exempted security or commercial paper, bankers' acceptances, or
commercial bills)" unless the broker or dealer is registered with the
Commission.90 The "exempted
securities" for which broker-dealer registration is not required under Section
15 are strictly limited.91
They do not include, for example, securities issued
under Regulations A, D or S92 or
privately placed securities that would be "restricted" securities under
Securities Act Rule 144.93
Thus, broker-dealer registration generally is required to effect transactions in
securities that are exempt from registration under the Securities Act.94 In other words, third-party service
providers that act as brokers in connection with securities offerings are
required to register as broker-dealers, even when the securities are exempt from
registration under the Securities Act.95
We have noted before that broker-dealers must have
adequate facilities and personnel to promptly execute and consummate all of
their securities transactions.96 As
broker-dealers increasingly rely on electronic facilities, such as electronic
mail and Internet web sites, to handle communications and transactions with
their customers, they must have the facilities to handle the expected user
should consider taking steps to maintain their operational capability during
high-volume usage (such as when investors transmit electronic indications of
interest to purchase securities in online IPOs), and high-volume and
high-volatility trading days (such as the immediate aftermarket trading
following an IPO).98
D. Technology Concepts
Each technological advance brings changes to the
structure of the capital markets and the securities industry. While we believe
that the guidance provided in this release will be useful in the near term, we
also recognize that we will need to reexamine our regulatory system and
interpretive guidance as technology evolves. We will continue to examine and
consider the removal of regulations that pose unnecessary barriers to electronic
commerce and maintain those regulations that are essential to protect investors.
In that regard, we request comment below on specific issues that may arise in
the future in several areas. We also solicit comment on whether there are issues
involving electronic media under the federal securities laws that we have not
1. Access Equals
Various commentators have suggested that additional
regulatory changes may be warranted in the use of electronic media for delivery
purposes. The 1995 Release stated that issuers and market intermediaries with
delivery obligations would need to continue to make information available in
paper form until such time as electronic media became more universally
accessible and accepted.99
Some believe that this time has come and, therefore, that we should shift from
the present delivery model to an "access-equals-delivery" model. Under the
latter model, investors would be assumed to have access to the Internet, thereby
allowing delivery to be accomplished solely by an issuer posting a document on
the issuer's or a third-party's web site.
We believe that the time for an "access-equals-delivery"
model has not arrived yet. Internet access is more prevalent than in 1995, but
many people in this country still do not enjoy the benefits of ready access to
electronic media.100 Moreover, even
investors who are online are unlikely to rely on the Internet as their sole
means of obtaining information from issuers or intermediaries with delivery
obligations.101 Some investors
decline electronic delivery because they do not wish to review a large document
on their computer screens. Others decline electronic delivery because of the
time that it takes to download and print a document.
We request comment, however, as to whether there are
circumstances in which, consistent with investor protection, an
"access-equals-delivery" model might be appropriate. How many U.S. households
currently have Internet access? Is there data supporting the conclusion that
most investors have access to the Internet? Similarly, is there data supporting
the belief that investors who are online will rely on the Internet as their sole
means of obtaining information from issuers or intermediaries? Assuming that
this data exists, how will investors know when disclosure information has been
posted on an issuer's web site? If we were to adopt an "access-equals-delivery"
model, would we be creating a system that requires ownership of a late-model,
sophisticated computer to participate in the securities markets?
We also request comment on whether the disadvantages of
electronic delivery, such as lengthy downloading time and system capacity
limitations, are likely to be reduced or eliminated in the near future. Also,
will documents delivered online be more readable in the future?
2. Electronic Notice
The 1995 and 1996 Releases stated that notice of the
availability of electronically delivered disclosure documents must be delivered
directly to each investor. The 1995 Release further stated that notice on an
Internet web site and otherwise by publication in a newspaper is insufficient to
alert a consenting investor of the availability on a web site of a disclosure
We continue to believe that direct notice of the
availability of electronic disclosure documents is necessary unless an issuer or
market intermediary can otherwise establish that delivery has been made. For
example, a broker-dealer cannot meet its confirmation obligation under Exchange
Act Rule 10b-10103 by simply placing
a notice on its web site that a customer must "pull" down to access. Rather, a
Rule 10b-10 confirmation must be sent directly to the broker-dealer's customer.
Additionally, messages posted to an investor's account at his or her
broker-dealer's web site regarding the availability of electronic disclosure
documents are insufficient, unless they are promptly forwarded directly to the
investor. We request comment, however, as to whether changes in the
sophistication and expectations of Internet users as well as advances in
Internet technology warrant re-evaluation of our position on whether account
messages on an Internet web site provide sufficient notice. Were we to adopt
such an approach, would it result in shifting the burden from issuers to notify
security holders of the availability of electronic disclosure documents to
security holders to search for material information? Would a burden shift be
consistent with our investor protection mandate?
3. Implied Consent
In lieu of "access-equals-delivery," some commentators
have argued for changes to our electronic delivery scheme, particularly with
respect to investor consent to electronic delivery. We understand that obtaining
investor consent poses the most significant barrier to the use of electronic
delivery by issuers and market intermediaries.104 Some have suggested that electronic
delivery would be more common if issuers and intermediaries with delivery
obligations were permitted to use a form of implied consent to evidence
satisfaction of delivery. Under an implied consent model, an issuer could rely
on electronic delivery if investors do not affirmatively object when notified of
the issuer's or intermediary's intention to deliver documents in an electronic
format. Proponents of implied consent argue that the difficulties in obtaining
investors' consents to electronic delivery result not from the unwillingness of
investors to use an electronic medium, but rather from investors' inattention to
requests for affirmative consent.
We are concerned that investors would be significantly
and adversely affected by implied consent through their inadvertent failure to
object. We understand that in many circumstances investors are not inattentive
to requests for consent to electronic delivery, but rather, purposely do not
consent.105 Thus, we
generally believe that it would not be appropriate for issuers or intermediaries
to rely on implied consent.106
We request comment, however, as to whether there are particular circumstances
under which an implied consent model would be appropriate.107 For example, would it be appropriate
where investors previously have provided an electronic mail address to an issuer
or intermediary and have indicated that electronic mail is one of their methods
of communication for investing purposes? How would the fact that investors
sometimes change their electronic mail addresses affect an implied consent
The 1995 Release stated that, as a matter of policy,
issuers and market intermediaries with delivery obligations would need to
continue to deliver paper copies of documents that are required to be delivered
until such time as electronic media becomes more universally accessible and
accepted.108 This policy,
however, does not preclude "electronic-only" offerings. In an "electronic-only"
offering, investors are permitted to participate only if they agree to accept
electronic delivery of all documents in connection with the offering. The 1995
Release provided that an issuer could structure its offering as one that would
be effected entirely through electronic media.109 Even in these offerings, however, an
issuer or intermediary must provide the required documents in paper form if an
investor revokes his or her consent before valid delivery is made. Additionally,
the 1995 and 1996 Releases both provided that a paper copy of information
previously delivered electronically should be delivered whenever an investor so
requests, even when the revocation is made after electronic delivery or there
has been no revocation at all.110
Should the paper back-up system be required for
offerings where participation is conditioned upon consent to electronic-only
delivery?111 If not, would
there be any adverse effects? Would we be creating a two-tiered system with
access to some offerings available only to investors with Internet access?
Should an issuer be permitted to require investors to pay for paper delivery
when they have consented to electronic-only delivery? If the paper back-up
system were no longer required, how should investors be advised of any payment
requirement and any attendant risks? In the event of technical difficulties, how
would issuers and intermediaries comply with their delivery obligations, other
than by providing paper delivery? Should there be an exception to paper delivery
where technological difficulties would prevent electronic delivery in a timely
manner? What disclosures should be included in the notice to investors? If the
paper back-up system were no longer required generally, are there any particular
types of offerings, such as dividend reinvestment and direct stock purchase
plans, or DRSPPs, where the paper back-up system should be retained?
If the paper back-up system were no longer required for
public offerings, how would issuers meet their prospectus delivery requirements
for secondary market trading?112
Should an issuer be permitted to condition participation in offerings upon
consent to electronic delivery of all required Exchange Act reports? If not,
should an issuer be required to obtain a separate consent from security holders
in the newly public issuer in order to permit electronic-only delivery of
required Exchange Act reports?
For a mutual fund, would there be any potential adverse
effects of limiting electronic-only offerings to investors who provide an
irrevocable consent to electronic delivery of all future disclosure documents,
including shareholder reports, proxy solicitation materials and prospectuses
provided in connection with the purchase of additional fund shares?
5. Access to Historical
One of the unique characteristics of the Internet is the
continuous availability of information once it is posted on a web site. For
example, a press release disseminated over a wire service or through other
customary means is considered to have been "issued" once, and thereafter is not
recirculated to the marketplace. The same press release posted on an issuer's
web site potentially has a longer life because it provides a record that can be
accessed by investors at any time and upon which investors potentially could
rely when making an investment decision without independent verification. In
effect, a statement may be considered to be "republished" each time that it is
accessed by an investor or, for that matter, each day that it appears on the web
Commentators have suggested that if a statement is
deemed to be republished, it may potentially give rise to liability under
Section 10(b) of the Exchange Act and Rule 10b-5.113 We request comment on how to
facilitate the availability of historical information on the Internet consistent
with the federal securities laws. Additionally, how can technology help minimize
investor confusion while providing for the accessibility of potentially useful
6. Communications When in
Although we believe that our long-standing guidance on
permissible communications is adequate to address many of the questions
applicable to an issuer's web site content when in registration, we recognize
that the Internet has spawned new types of businesses that do not easily fit
within the existing disclosure framework. For example, many issuers not only use
their web sites to conduct business through the Internet, their web sites are their businesses. In this instance, when an issuer
is in registration, how should the issuer segregate its business activities from
its offering activities? In other words, how can an issuer comply with its
obligations under Section 5 of the Securities Act while maintaining
communications to the marketplace related solely to its legitimate business
Are there special considerations for mutual funds
because they continuously offer and sell their shares to the public and,
therefore, always maintain effective registration statements? For a mutual fund
that continuously offers its shares, what, if any, facts and circumstances
should overcome the strong inference114 that hyperlinked information on a
third-party web site that meets the definition of an "offer to sell," "offer for
sale" or "offer" under Section 2(a)(3) of the Securities Act is attributable to
an issuer for purposes of anti-fraud liability?
7. Internet Discussion
Another distinguishing characteristic of the Internet is
its facility for interactive discussion. This discussion can, and does, cover
virtually any subject, including issuers and their securities. In the corporate
context, at least three different means of Internet "discussions" have evolved.
First, many web sites offer moderated discussion forums, typically led by a
real-time moderator and featuring a guest "expert." Other web sites contain
"bulletin boards," cyberspace message centers where comments concerning issuers,
securities or industries can be posted and saved for viewing over an extended
period of time. Finally, numerous web sites host discussion groups, or "chat
rooms," with real-time postings and viewing by participants on a wide variety of
These discussion forums present unique and often
difficult problems for issuers.115
We request comment on any issues relating to Internet discussion forums. In
particular, what effect, if any, do discussion group communications have on an
issuer's stock price? In addition, should issuers or broker-dealers that host
online discussion forums adopt and maintain "best practices" for participation
in these forums? If so, who should establish these best practices, and what
should be included in them?
Another area of significant concern involves the use of
Internet discussion forums by an issuer's employees. Are issuers currently using
specific procedures covering the use of electronic forms of communications by
their employees? If so, what are these "best practices"?
A series of examples is provided below to illustrate
various applications of the interpretations outlined in this release and to
provide guidance in applying them to specific facts and circumstances. We note,
however, that these examples are non-exclusive methods of ways to comply with
the above interpretations. Additionally, the analysis required to determine
compliance with the federal securities laws is fact-specific, and any different
or additional facts might require a different conclusion. We request comment on
whether other examples might be appropriate for publication.
(1) Investor John Doe gives XYZ Delivery Service his
informed consent over the telephone using automated touch tone instructions
(after accessing the service using a personal identification number).116 The automated
instructions informed John Doe of the manner, costs and risks of electronic
delivery. The consent related to electronic delivery of documents. Before
delivering any electronic documents to Investor John Doe, XYZ Delivery Service
sends Investor John Doe a letter confirming that he had consented to electronic
The confirming letter sent by XYZ Delivery Service
provides assurance that John Doe consented to the same extent as if he had
provided a written or electronic consent. Thus, XYZ Delivery Service's
procedures would evidence satisfaction of delivery. We also note that XYZ
Delivery Service has reason to be assured of the authenticity of John Doe's
telephonic consent because of his use of a personal identification number.
(2) In speaking with Broker DEF over the telephone,
Investor Jane Doe (a long-term customer of Broker DEF) consents to electronic
delivery to all future documents of Company XYZ on Company XYZ's Internet web
site. Broker DEF agrees to notify Jane Doe by electronic mail (or other
acceptable means of notification) that Company XYZ has posted the documents on
its web site when the posting occurs. Before obtaining Jane Doe's consent,
Broker DEF advises Jane Doe that she may incur certain costs associated with
delivery in this manner (for example, online time and printing) and possible
risks (for example, system outages). Broker DEF also advises Jane Doe that the
term of the consent is indefinite but that the consent can be revoked at any
time. Broker DEF maintains a signed and dated memorandum in its files regarding
the details of the conversation.
In this situation, Jane Doe's consent would be informed
regarding the manner, costs and risks of electronic delivery. We also note that
Broker DEF has reason to be assured of the authenticity of Jane Doe's telephonic
consent because Jane Doe is well known to Broker DEF.
(3) In seeking a global consent to electronic delivery
from Investor John Doe, Broker DEF specifies that the electronic media that may
be used to deliver documents will be CD-ROM, an Internet web site, electronic
mail or facsimile transmission, and further advises John Doe that if he does not
have access to all of these media he should not consent to electronic delivery.
John Doe consents to electronic delivery from Broker DEF.
In this situation, John Doe's consent would be informed
regarding the manner of electronic delivery. The consent need not specify which
form of media a specific issuer may use.
(4) Investor Jane Doe consents to delivery via a
third-party delivery service's Internet web site of all future documents of
Company ABC, Company XYZ and any additional companies in which she invests in
the future. Jane Doe subsequently purchases securities of Company DEF.
Thereafter, Company XYZ and Company DEF post their final prospectuses on the
third-party web site and notify Jane Doe by electronic mail (or other acceptable
means of notification) of the availability of the prospectuses. Company ABC does
not post its prospectus on the third-party web site but delivers a CD-ROM
version of its prospectus.
Company XYZ has satisfied its delivery obligations.
Additionally, although not specifically identified in the consent, Company DEF
has satisfied its delivery obligations because the consent covered delivery by
companies added at a later date. Absent other factors indicating that Jane Doe
actually accessed Company ABC's CD-ROM prospectus, however, Company ABC's
procedure would not satisfy its delivery obligations because Jane Doe consented
to delivery only by an Internet web site. If consent is to be relied upon, the
consent must cover the specific electronic medium or media that may be used for
(5) Investor John Doe consents to delivery of all future
documents of Company XYZ electronically via Company XYZ's Internet web site,
including documents delivered in PDF. The form of consent advises John Doe of
the system requirements necessary for receipt of documents in PDF and cautions
that downloading time may be slow. Company XYZ places its proxy soliciting
materials and annual report to security holders in PDF on its Internet web site,
with a hyperlink on the same screen enabling users to download a free copy of
Adobe Acrobat (software permitting PDF viewing) and a toll-free telephone number
that investors can use to contact someone during Company XYZ's business hours
for technical assistance or to request a paper copy of a document.
Company XYZ has satisfied its delivery obligations.
Under these circumstances, John Doe can effectively access the information
(6) Company XYZ, which is engaged in a public offering
of its securities, places its preliminary prospectus on its Internet web site.
In the Business section of the prospectus, Company XYZ has placed a hyperlink to
a report by a marketing research firm located on a third-party web site
regarding Company XYZ's industry.
Because the hyperlink is embedded within the prospectus,
the report becomes a part of the prospectus and must be filed with the
Commission. In addition, Company XYZ must obtain a written consent from the
person preparing the report in accordance with Securities Act Rule 436, 17 CFR
230.436. This consent also must be filed with the Commission. Moreover, the
report will be subject to liability under Section 11 of the Securities Act, as
well as other anti-fraud provisions of the federal securities laws.
(7) Company XYZ, which is engaged in a public offering
of its securities, places its preliminary prospectus on its Internet web site.
Each of the topics in the Table of Contents is a hyperlink, allowing investors
to pick a topic and immediately be hyperlinked to the section in the prospectus
relating to that topic.
The hyperlinks present no federal securities law issues.
The hyperlinks do no more than allow investors to turn electronically to a
specific page in the prospectus.
(8) Company XYZ, which is engaged in a public offering
of its securities, places its preliminary prospectus on its Internet web site.
Immediately following the button for the prospectus on the web site, Company XYZ
offers investors the ability to download its financial statements in spreadsheet
format. This financial information is not modified in any way from that
contained in the filed document.
The provision of financial statements in spreadsheet
format would be permissible when the download results only in a mere difference
in format without any difference in text. The completeness of the financial
statements must not be compromised by any difference in the electronic version
from the paper version.
III. Solicitation of Comment
We invite anyone who is interested to submit written
comments on this release. We request comment not only on the specific issues
discussed in this release, but also on any other approaches or issues involved
in facilitating the use of electronic media to further the disclosure purposes
of the federal securities laws. We request comment from the point of view of
both parties providing the disclosure, such as issuers and those acting on
behalf of issuers, and parties receiving and using the disclosure, such as
investors and security holders.
List of Subjects in 17 CFR Parts 231, 241 and 271
Amendment of the Code of Federal
For the reasons set out in the preamble, Title 17
Chapter II of the Code of Federal Regulations is amended as set forth below:
PART 231 - INTERPRETATIVE
RELEASES RELATING TO THE SECURITIES ACT OF 1933 AND GENERAL RULES AND
1. Part 231 is amended by adding Release No. 33-7856 and
the release date of April 28, 2000, to the list of interpretive releases.
PART 241- INTERPRETATIVE
RELEASES RELATING TO THE SECURITIES EXCHANGE ACT OF 1934 AND GENERAL RULES AND
2. Part 241 is amended by adding Release No. 34-42728
and the release date of April 28, 2000, to the list of interpretive releases.
PART 271- INTERPRETATIVE
RELEASES RELATING TO THE INVESTMENT COMPANY ACT OF 1940 AND GENERAL RULES AND
3. Part 271 is amended by adding Release No. IC-24426
and the release date of April 28, 2000, to the list of interpretive
By the Commission.
Jonathan G. Katz
Dated: April 28, 2000
1 We do not edit personal, identifying
information, such as names or electronic mail addresses, from electronic
submissions. Submit only information you wish to make publicly available.
2 Katrina Brooker, They
Want You Wired; Brokerage Firms of All Kinds are Tripping Over Themselves to
Compete Online for Customers, Fortune, Dec. 20, 1999, at 113. See also Online Brokerage: Keeping Apace of Cyberspace, Report
of Laura S. Unger, Commissioner, U.S. Securities and Exchange Commission, Nov.
1999 (the Unger Report), at 1 (the percentage of equity trades conducted online
in the first quarter of 1999 was 15.9% of all equity trades). The report is
available on our Internet web site at
3 It is estimated that over 160 brokerage firms
offer their customers the ability to trade securities online. See the Unger Report, n. 2 above, at 15.
4 Through March of this year, we had filed
approximately 120 Internet-related enforcement actions. See Statement of Chairman
Arthur Levitt before the Senate Subcommittee on Commerce, Justice, State and the
Judiciary, Committee on Appropriations, re: Appropriations for Fiscal Year
2001, Mar. 21, 2000. The statement is available on our Internet web site at
<http://www.sec.gov/news/testmony/ts052000.htm>. We also have conducted
three Internet enforcement sweeps. See SEC Steps Up
Nationwide Crackdown Against Internet Fraud, Charging 26 Companies and
Individuals for Bogus Securities Offerings, SEC Press Release 99-49 (May 12,
1999); SEC Continues Internet Fraud Crackdown, SEC Press Release 99-24 (Feb. 25,
1999); Purveyors of Fraudulent Spam, Online Newsletters, Message Board Postings,
and Websites, SEC Press Release 98-117 (Oct. 28, 1998). These press releases are
available on our Internet web site at
5 See Securities Act
Release No. 7760 (Oct. 22, 1999) [64 FR 61408]. This new regulatory system
relaxes restrictions on communications in cash tender offers, mergers, exchange
offers and proxy solicitations.
6 We also are considering separately the use of
road shows in the capital-raising context.
7 A "hypertext link," or "hyperlink," is an
electronic path often displayed in the form of highlighted text, graphics or a
button that associates an object on a web page with another web page address. It
allows the user to connect to the desired web page address immediately by
clicking a computer-pointing device on the text, graphics or button. See Harvey L. Pitt & Dixie L. Johnson, Avoiding Spiders on the Web: Rules of Thumb for Issuers
Using Web Sites and E-Mail, in Practising Law Institute, Securities Law
& the Internet, No. 1127 (1999), at 107-118, n. 5.
8 In this release, when we refer to a Section 10
prospectus, we are referring both to prospectuses satisfying the requirements of
Section 10(a) of the Securities Act, 15 U.S.C. §77j(a), and prospectuses
satisfying the requirements of Section 10(b) of the Securities Act, 15 U.S.C.
9 15 U.S.C. §77b(a)(3).
10 "In registration" is a
term that refers to the entire registration process under the Securities Act,
"at least from the time an issuer reaches an understanding with the
broker-dealer which is to act as managing underwriter [before] the filing of a
registration statement" until the end of the period during which dealers must
deliver a prospectus. See Securities Act Release No.
5180, at n. 1 (Aug. 16, 1971) [36 FR 16506]. An issuer will not be considered to
be "in registration" at any particular point in time solely because it has filed
one or more registration statements on Form S-8, 17 CFR 239.16b, or it has on
file a registration statement for a delayed shelf offering on Form S-3, S-4, F-3
or F-4, 17 CFR 239.13, 239.25, 239.33 or 239.34, and has not commenced or is not
in the process of offering or selling securities "off of the shelf."
11 Securities Act Release
No. 7233 (Oct. 6, 1995) [60 FR 53458] (the 1995 Release).
12 15 U.S.C. §77a, et seq.
13 15 U.S.C. §78a, et seq.
14 15 U.S.C. §80a-1, et seq.
15 Securities Act Release
No. 7288 (May 9, 1996) [61 FR 24644] (the 1996 Release). The 1996 Release also
provided additional examples supplementing the guidance in the 1995 Release.
Since 1996, we have further addressed the use of electronic media in the context
of offshore sales of securities and investment services, see Securities Act Release No. 7516 (Mar. 23, 1998) [63
FR 14806] (the 1998 Release), and cross-border tender offers, see Securities Act Release No. 7759, Section II.G (Oct.
22, 1999) [64 FR 61382].
16 15 U.S.C. §80b-1, et seq.
17 In Section D below, we
also request comment on a number of additional issues involving electronic
18 See the 1995 Release, n. 11 above, at n. 29 and the
19 See the 1996 Release, n. 15 above, at n. 23.
20 See John R. Hewitt & Richard B. Carlson, Securities Practice and Electronic Technology, Law
Journal Seminars-Press (1998), at 3.01.
21 See Stephen I. Glover & Lanae Holbrook, Electronic Proxies, Nat. L. J., Mar. 29, 1999, at B5;
See also Jennie
Blizzard, Investor Relations Gets Tech Updates; Proxy
Voting Among the Signs of Change, Rich. Times Dispatch, Mar. 28, 1999, at
E1. Similarly, mutual fund shareholders may effect purchases and redemptions of
fund shares telephonically, where permitted by the fund and under applicable
22 The record of telephonic
consent should contain as much detail as any written consent, including whether
the consent obtained is global and what electronic media will be used.
23 See, for example, Ex. 1 and Ex. 2 in Section E below.
24 See the 1995 Release, n. 11 above, at Ex. 3 (consent by
investor John Doe to delivery of all future
documents by electronic mail) and Ex. 26 (consent by record holder Jane Doe to
delivery of all documents via Company XYZ's web
25 Id. at Ex. 6. Under this interpretation, we also
believe, and we further clarify today, that an issuer or broker-dealer may rely
on a consent obtained by a third-party document delivery service, but the issuer
or broker-dealer retains the ultimate responsibility for assuring that the
consent is authentic and for the delivery of required documents.
26 Generally, a consent is
considered to be informed when an investor is apprised that the document to be
provided will be available through a specific electronic medium or source (for
example, through a limited proprietary system or at an Internet web site) and
that there may be costs associated with delivery (for example, in connection
with online time). In addition, for a consent to be informed an investor must be
apprised of the time and scope parameters of the consent. For example, an
investor should be made aware of whether the consent is indefinite and extends
to more than one type of document. See note 29 of
the 1995 Release, n. 11 above, for a discussion of the information that must be
disclosed in an informed consent.
27 We recognize that some
brokerage firms require accounts to be opened online and all account
transactions to be initiated and conducted online. In these instances only, the
opening of a brokerage account may be conditioned upon providing global consent
to electronic delivery.
28 See the 1995 Release, n. 11 above, at Section II.C.
29 See n. 18 above.
30 See, for example, Ex. 3 in Section E below.
31 See, for example, Ex. 4 in Section E below.
32 See the 1995 Release, n. 11 above, at n. 24 and the
33 In 1999, we began
modernizing the Electronic Data Gathering, Analysis and Retrieval, or EDGAR,
system. See Securities Act Release No. 7684 (May 17,
1999) [64 FR 27888]. One effect of the modernization was to allow filings to be
submitted in HTML. Filers also were given the option of accompanying their
required filings with unofficial copies in PDF.
34 See, for example, Ex. 5 in Section E below. We remind
issuers and intermediaries that we will not consider an electronically delivered
document to have been preceded or accompanied by another electronic document
unless investors are provided with reasonably comparable access to both
documents. See the 1996 Release, n. 15 above, at Ex.
35 See the 1995 Release, n. 11 above, at Ex. 14.
36 Id. at Ex. 15 and Ex. 16.
37 See Sections 2(a)(10) and 5(b) of the Securities Act,
15 U.S.C. §§77b(a)(10) and 77e(b).
38 Some securities lawyers
have raised similar issues concerning the use of a web site in connection with
proxy solicitations, tender offers and other transactions that require documents
to be filed or delivered under the federal securities laws. Although the
guidance in this section focuses on issues relating to the registration process,
it applies by analogy to all documents required to be filed or delivered under
the federal securities laws.
39 In Example 14 of the
1995 Release, see n. 11 above, we stated that
documents that appear in close proximity to each other on the same web site menu
are considered delivered together. Given the layout of a typical web page, which
often includes multiple "buttons" spread throughout the page rather than in menu
format, issuers may be confused by our reference in the 1995 Release to "menu."
Two or more documents will be considered to be delivered together if the buttons
are in proximity to each other on the same screen, whether or not they are on
the same "menu."
40 By "free writing," we
mean communications that would constitute an "offer to sell," "offer for sale"
or "offer," including every attempt or offer to dispose of, or solicitation of
an offer to buy, a security or interest in a security, for value under Section
2(a)(3) of the Securities Act made by means other than a prospectus satisfying
the requirements of Section 10 of the Securities Act, 15 U.S.C. §77j. Section
2(a)(10) of the Securities Act defines the term "prospectus."
41 When an issuer includes
a hyperlink within a document required to be filed or delivered under the
federal securities laws, we believe it is appropriate for the issuer to assume
responsibility for the hyperlinked information as if it were part of the
document. We believe that the inclusion of a hyperlink to an external web site
or document demonstrates the hyperlinking party's intent to make the information
part of its communication with investors, security holders and the markets.
Additionally, because written offers must be made exclusively through a Section
10 prospectus, when an issuer includes a hyperlink to an external web site or
document within a Section 10 prospectus, the issuer expresses its intent to have
the hyperlinked information treated as part of this exclusive means of offering
its securities. An issuer (or person acting on behalf of the issuer, including
an intermediary with delivery obligations) must make it clear to investors where
the document from which it is hyperlinking begins and where it ends.
We are aware that today many standard software programs
can automatically convert an inactive uniform resource locator, or URL, into an
active hyperlink, either at the time the document including the URL is created
or when the document is later accessed. Consequently, as with an embedded
hyperlink, an issuer that includes a URL to a web site in a Section 10
prospectus or other document required to be filed or delivered under the federal
securities laws is responsible for information on the site that is accessible
through the resulting hyperlink. To the extent that the document is required to
be filed with the Commission, the hyperlinked information must be filed as part
of the document. Inclusion of the URL to the Commission's Internet web site is
mandated by some of our disclosure requirements. See, for example, Item 502(a)(2) of Regulation S-K, 17
CFR 229.502(a)(2); Item 12(c)(2)(ii) of Form S-3, 17 CFR 239.13. Additionally,
the Division of Corporation Finance has previously indicated that the inclusion
of the URL for an issuer's web site in a registration statement, along with the
statement "[O]ur SEC filings are also available to the public from our web
site," will not, by itself, include or incorporate by reference the information
on the site into the registration statement (unless the issuer otherwise acts to
incorporate the information by reference). See
Division of Corporation Finance interpretive letters Baltimore Gas and Electric Company (Jan. 6, 1997); ITT Corporation (Dec. 6, 1996). In these two
situations, we would not consider the presence of the URL to make our web site,
or an issuer's web site, as the case may be, part of a document if the party
presenting the URL takes reasonable steps to ensure that the URL is inactive
(for example, by removing "a>href" tagging) and includes a statement to
denote that the URL is an inactive textual reference only.
42 An issuer may not use
embedded hyperlinks exclusively to satisfy the line item disclosure requirements
of its filings under the federal securities laws. For example, an issuer filing
a registration statement on Form S-1, 17 CFR 239.11, could include embedded
hyperlinks to its Exchange Act reports so that they are readily available, but
only if the issuer otherwise includes full disclosure of all required issuer
information within the body of the Section 10 prospectus. This is because the
Commission's rules and forms contemplate a single comprehensive, integrated
document so that readers can understand the document's content without having to
access numerous other documents.
We also note that simply embedding a hyperlink within a
document does not satisfy the line item disclosure requirement for the
incorporation of certain information by reference as provided under the
Commission's rules and forms. In order for a document to be incorporated by
reference in a filed document, an issuer must include a statement to that effect
in the document listing the incorporated documents. See, for example, Item 12(a) of Part I of Form S-3;
General Instruction G(4) of Form 10-K, 17 CFR 249.310; Exchange Act Rule
12b-23(b), 17 CFR 240.12b-23(b).
43 15 U.S.C. §77k. See, for example, Ex. 6 in Section E below. Of course,
other Securities Act and Exchange Act liability provisions also may apply. See, for example, Sections 12(a)(2) and 17(a) of the
Securities Act, 15 U.S.C. §§77l(a)(2) and 77q(a),
Section 10(b) of the Exchange Act, 15 U.S.C §78j(b), and Rule 10b-5, 17 CFR
240.10b-5. Although a prospectus or other disclosure document on an issuer's web
site may contain a hyperlink to an external web site or document under the
circumstances described in this section, a hyperlink to an external site or
document (including exhibits) currently may not be
embedded in any filed EDGAR document. See Rule 105
of Regulation S-T, 17 CFR 232.105; Securities Act Release No. 7684 (May 17,
1999) [64 FR 27888]. However, filers may include hyperlinks to different
sections within a single HTML document. Under our recently adopted rules
implementing the next phase of EDGAR modernization, the system now permits
hyperlinks from an EDGAR filing to its exhibits and to other filings in the
EDGAR database on our Internet web site at <http://www.sec.gov>. See Securities Act Release No. 7855 (Apr. 24, 2000) [65
FR 24788]. The new rules address the liability treatment of material hyperlinked
from the EDGAR database into EDGAR filings, but do not address broader issues of
hyperlinks on issuers' web sites.
44 15 U.S.C. §77l.
45 See n. 40 above. While the proximity of information on
an issuer's web site to a Section 10 prospectus posted on the same site will
determine whether multiple documents are delivered together, it does not dispose
of the issue of whether the information would constitute an "offer to sell,"
"offer for sale" or "offer" under Section 2(a)(3) of the Securities Act. We
provide guidance in Section B below about permissible communications on an
issuer's web site when the issuer is in registration.
46 17 CFR 240.15c2-12.
47 See Exchange Act Release
No. 7049 (Mar. 9, 1994) [59 FR 12748]. All issuers, whether offering and selling
securities in registered or exempt offerings, are subject to anti-fraud
liability. See Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5.
48 While our guidance in
this section addresses the responsibilities of issuers, broker-dealers and
investment advisers also should carefully consider their responsibilities for
49 See Securities Act Release No. 6504 (Jan. 20, 1984) [49
FR 2468]. Where a statement is materially misleading, an issuer and any persons
responsible for the statement would be liable under the anti-fraud provisions of
the federal securities laws. See, for example, SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.
1968) (en banc), cert. denied sub nom., Coates v. SEC, 394 U.S. 976 (1969).
50 When an issuer is
offering or selling securities, similar questions arise under Section 17(a) of
the Securities Act. Although our discussion is framed in terms of Section 10(b)
of the Exchange Act and Rule 10b-5, it applies equally to questions arising
under Section 17(a).
51 See n. 54 below.
52 See In the Matter of Presstek,
Inc., Exchange Act Release No. 39472 (Dec. 22, 1997), n. 54 below.
53 See, for example, Elkind v.
Liggett & Myers, Inc., 635 F.2d 156 (2d Cir. 1980); In the Matter of Syntex Corp. Sec. Litig., 855 F.Supp. 1086 (N.D. Cal. 1993); In the Matter of Caere Corp. Sec. Litig., 837 F. Supp.
1054 (N.D. Cal. 1993).
54 See, for example, In the Matter
of Cypress Semiconductor Sec. Litig., 891 F. Supp. 1369, 1377 (N.D. Cal.
1995), aff'd sub nom. Eisenstadt v. Allen,
113 F.3d 1240 (9th Cir. 1997) ("distributing analysts' reports to potential
investors may, depending on the circumstances, amount to an implied
representation that the reports are accurate"); In the
Matter of RasterOps Corporation Sec. Litig., [1994-95 Tr. Binder]
Fed.Sec.L.Rep. (CCH) ¶98,467 (N.D. Cal. 1994) ("act of circulating the reports
amounts to an implied representation that the information contained in the
reports is accurate or reflects the company's views"). See also Presstek, n. 52 above. In Presstek, we stated that "in the Commission's view,
under certain circumstances, an issuer that disseminates false third-party
reports may adopt the contents of those reports and be fully liable for the
misstatements contained in them, even if it had no role whatsoever in the
preparation of the report." Id. at 32.
55 We do not discuss the
application of the "entanglement" theory to hyperlinked information on
third-party web sites. We recognize that the "entanglement" and "adoption"
theories often overlap and that some of the factors relating to an adoption
analysis also may apply to an entanglement analysis. Once the threshold issue of
whether hyperlinked third-party information has been adopted by an issuer has
been answered, a trier of fact would then turn to the issue of whether a claim
has been established under Section 10(b) of the Exchange Act and Rule 10b-5. A
claim under Section 10(b) and Rule 10b-5 generally includes the following
- misrepresentation of a material fact or omission of a
material fact necessary to make a statement, in light of the circumstances under
which it was made, not misleading,
- in the sale, or in connection with the purchase or
sale, of a security,
- with the requisite state of mind, or scienter.
Liability to a private plaintiff also requires proof
that the plaintiff justifiably relied on the statement containing the material
misrepresentation or omission and was injured as a result. See, for example, Robbins v.
Koger Properties, Inc., 116 F.3d 1441, 1447 (11th Cir. 1997). Investor
reliance on a material misrepresentation or omission need not be shown in a
Commission enforcement action. See Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).
Under certain circumstances, there may be a rebuttable presumption of reliance.
See, for example, Basic,
Inc. v. Levinson, 485 U.S. 224 (1988) (discussing the "fraud on the market"
theory). Similarly, where materiality is established, reliance in an omissions
case is presumed. See Affiliated Ute Citizens of Utah v. United States, 406
U.S. 128 (1972).
56 See Section B.1.c below.
57 See Section A. 4 above.
58 See Section B.2 below
for a discussion of the effect of an issuer hyperlink to information on a
third-party web site for purposes of Section 5 of the Securities Act.
59 "Framing" involves a
form of hyperlinking. Upon clicking highlighted text, graphics or a button,
information from a separate web site is imported into the web site that is being
used and is displayed within a constant on-screen border, or frame. In this
case, information from an issuer's web site and the hyperlinked web site would
be visible at the same time. The user may not be aware that the displayed
material is actually from a different web site.
60 "Inlining" is similar to
framing but does not result in a visible border. As with framing, information
from an issuer's web site and the hyperlinked web site would be visible at the
same time. Also, as with framing, a web site user may not be aware that the
displayed material is actually from a different web site.
61 Some of our prior
statements may have created the erroneous impression that the use of a
disclaimer, in and of itself, may be effective to shield an issuer from adoption
of, and liability under Section 10(b) of the Exchange Act and Rule 10b-5 in
connection with, information on a third-party web site to which the issuer has
established a hyperlink. See, for example, the 1998
Release, n. 15 above, in which we addressed when the posting of offering or
solicitation materials on a web site would not be considered activity taking
place in the United States. The 1998 Release did not address the anti-fraud
provisions of the federal securities laws, however, which continue to reach all
Internet activities that satisfy the relevant jurisdictional tests. We do not
view a disclaimer alone as sufficient to insulate an issuer from responsibility
for information that it makes available to investors whether through a hyperlink
or otherwise. To conclude otherwise would permit unscrupulous issuers to make
false or misleading statements available to investors without fear of liability
as long as the information is accompanied by a disclaimer. Further, we remind
issuers that specific disclaimers of anti-fraud liability are contrary to the
policies underpinning the federal securities laws. See Section 14 of the Securities Act, 15 U.S.C. §77n,
Section 29(a) of the Exchange Act, 15 U.S.C. §78cc(a), Section 47(a) of the
Investment Company Act, 15 U.S.C. §80a-46(a), and Section 215(a) of the
Investment Advisers Act, 15 U.S.C. §80b-15(a).
62 In Securities Act
Release No. 7606A (Nov. 13, 1998) [63 FR 67174], we proposed exemptions to
address many of the issues in this area. We will continue to consider these
proposals as part of a broader regulatory review of restrictions on
communications. We also have adopted rules relaxing restrictions on
communications in the business combination context. If a registered offering
involves a merger or other business combination, new Securities Act Rules 165
and 166, 17 CFR 230.165 and 230.166, enable the parties to the transaction or
persons acting on their behalf to communicate information about the transaction
and the parties to it outside of the Section 10 prospectus. See Securities Act Release No. 7760 (Oct. 22, 1999) [64
FR 61408]. Thus, information relating to a business combination may remain on an
issuer's web site provided it is filed in accordance with Securities Act Rule
425, 17 CFR 230.425.
63 15 U.S.C. §77e.
64 Except with respect to
business combinations, no offers of any kind may be made before filing a
registration statement. Section 5(c) of the Securities Act, 15 U.S.C. §77e(c).
During the period between filing and delivery of the final prospectus, written
offers and offers transmitted by radio or television must conform to the
requirements of Section 10 of the Securities Act. See Sections 2(a)(10) and 5(b) of the Securities Act.
65 See n. 68 below. From a policy standpoint, regulating
communications during the offering process can be justified as a reasonable
balancing of the incentives that the process creates for participants to
stimulate interest in an issuer's securities. During the offering process "the
increased compensation to distributors and the compressed period of the selling
effort, as well as the issuer's interest in obtaining funds, set up a situation
in which potential conflicts of interest between investors and sellers are
enhanced." See Reforming the
Securities Act of 1933 -- A Conceptual Framework, an Address by Linda C. Quinn,
Director, Division of Corporation Finance, Securities and Exchange Commission,
to the American Bar Association, Section of Business Law, Committee on Federal
Regulation of Securities, Fall Meeting, Nov. 11, 1995, at 6.
66 See Section B.1.a above for a discussion of the effect
of an issuer hyperlink to information on a third-party web site for purposes of
the anti-fraud provisions of the federal securities laws. We note that the "safe
harbor" from Section 5 of the Securities Act contained in Securities Act Rule
137, 17 CFR 230.137, that permits broker-dealers not participating in a
distribution to publish or distribute research without the research being deemed
to be an "offer" for purposes of Sections 2(a)(11) of the Securities Act, 15
U.S.C. §77b(a)(11), and the "safe harbors" from Section 5 contained in
Securities Act Rules 138 and 139, 17 CFR 230.138 and 230.139, that permit
broker-dealers to publish or distribute research without the research being
deemed to be an "offer to sell" or "offer for sale" for purposes of Sections
2(a)(10) and 5(c) of the Securities Act, do not extend to permit issuers to
publish or distribute the same information. See the
1995 Release, n. 11 above, at Ex. 16.
67 See, for example, the
information guidelines contained in Securities Act Release No. 5180 (Aug. 16,
1971) [36 FR 16506]; Securities Act Release No. 5009 (Oct. 7, 1969) [34 FR
16870]; Securities Act Release No. 4697 (May 28, 1964) [29 FR 7317]; and
Securities Act Release No. 3844 (Oct. 8, 1957) [22 FR 8359].
68 Limited issuer
statements about an offering may be made (electronically or otherwise) before
the filing of a registration statement. Securities Act Rule 135, 17 CFR 230.135,
permits an issuer to notify the public of a proposed offering of securities
during the pre-filing period as long as the contents of the notice do not exceed
the items specified in the rule. Securities Act Rule 135c, 17 CFR 230.135c,
permits issuers subject to the reporting requirements of the Exchange Act, and
certain exempt foreign issuers, to make public announcements of proposed private
offerings of securities without any such announcement being deemed an "offer"
for purposes of Section 5 of Securities Act, as long as it is not used to
condition the market and is limited to the factual items specified in the rule.
These safe harbors also may be invoked after the filing of a registration
statement. Once a registration statement has been filed, an issuer may publish
(electronically or otherwise) a brief description of its business and limited
additional information on the securities being offered. Securities Act Rule 134,
17 CFR 230.134, permits an issuer to make limited offering communications
following the filing of a registration statement as long as the contents of the
communications are limited to the items specified in the rule and the other
conditions of the rule are met.
Securities Act Rule 135e, 17 CFR 230.135e, permits a
foreign private issuer and other offering participants to provide journalists
with access to offshore press activities that discuss a present or proposed
offering of securities. Rule 135e requires that press-related materials be
released only outside the United States and that press conferences be held
outside the United States. As a result, we believe that dissemination through
the Internet by the issuer or other person covered by Rule 135e of these
materials or press conferences will not comply with Rule 135e unless procedures
are implemented to assure that only permitted recipients under the rules are
able to access the information.
We also have adopted special safe harbor rules for
mutual funds, which, unlike typical corporate issuers, continuously offer and
sell their shares to the public and, therefore, are continuously subject to the
limitations on issuer communications under the Securities Act. Securities Act
Rule 482, 17 CFR 230.482, permits a mutual fund to advertise performance and
other information about the fund, provided that the advertisement contains only
information the substance of which is included in the fund's prospectus.
Securities Act Rule 134 contains special provisions for mutual funds, permitting
funds to advertise a broad range of information, other than performance
69 See Division of Corporation Finance no-action letter Wit Capital Corporation (July 14, 1999).
70 We are aware that
municipal securities issuers and municipal securities underwriters have begun to
evaluate the online offering process and that a limited number of offerings have
been conducted over the Internet. At this time, we are not addressing the
implications of online municipal securities offerings, but we encourage comment
on this topic. We remind municipal securities issuers and other municipal
securities market participants, however, of the potential issue that arises if
the municipal securities offering also involves an offering of a separate
security that is not being sold pursuant to the exemption from registration
contained in Section 3(a)(2) of the Securities Act, 15 U.S.C. §77c(a)(2). If the
municipal securities offering involves an offering of a separate security that
is being sold in reliance on an exemption from registration contained in Section
4(2) of the Securities Act, 15 U.S.C. §77d(2), or Regulation D, 17 CFR 230.501,
et seq., or in a
registered offering, our discussion in Section C.2 below applies. We, therefore,
caution municipal securities offering participants wishing to offer municipal
securities online to evaluate carefully whether any separate security is being
71 See Joseph Weber & Peter Elstrom, Transforming the Art of the Deal, Bus. Wk., July 26,
1999, at 96; Shawn Tully, Will the Web Eat Wall
Street?, Fortune, Aug. 2, 1999, at 112.
72 There also have been
numerous reports where investors complained that they did not receive shares in
an online IPO. See Randall Smith, So Far, "E-Underwriting" Gets a Slow Start, Wall St.
J., Aug. 16, 1999, at C1. See also Randall Smith, Online
Brokers to Form Bank in Bid for IPOs, Wall St. J., Nov. 15, 1999, at C1;
Randall Smith & Lee Gomes, How Get Rich Hopes of
Linux Techies Went Up in Flames, Wall St. J., Aug. 18, 1999, at A1.
73 Section 5(a) of the
Securities Act, 15 U.S.C. §77e(a).
74 Securities Act Rule
134(d), 17 CFR 230.134(d).
75 See Sections 2(a)(10) and 5(b) of the Securities Act.
Section 5(c) of the Securities Act also proscribes both oral and written offers
before the filing of a registration statement or while the registration
statement is subject to a refusal order, stop order or, before effectiveness,
any other public proceeding or examination under Section 8 of the Securities
Act, 15 U.S.C. §77h. For a description of the new rules regarding communications
in a business combination context, see n. 62 above.
Mutual funds are permitted to make written offers before
delivery of the final prospectus under Securities Act Rule 482 (permitting
advertisements containing only information "the substance of which" is included
in the fund's prospectus) and Securities Act Rule 498, 17 CFR 230.498
(permitting the use of a "profile," a summary disclosure document). Both Rule
482 advertisements and fund profiles are prospectuses under Section 10(b) of the
Securities Act, which permits a prospectus that omits in part or summarizes
information to be used to make offers before delivery of the final
76 See Securities Act Rules 134 and 135, n. 68 above.
77 See Sections 2(a)(10) and 5(b) of the Securities Act. A
confirmation of sale is not deemed a non-conforming prospectus when sent or
given after the effective date of a registration statement if a prospectus
satisfying the requirements of Section 10(a) of the Securities Act is sent or
given before or with the confirmation.
78 See Wit Capital
Corporation, n. 69 above.
79 See Rule 502(c) of Regulation D, 17 CFR 230.502(c).
General solicitation or advertising is prohibited in offerings under Rules 504,
505 and 506 of Regulation D, 17 CFR 230.504, 230.505 and 230.506. An exception
to the prohibition against general solicitation applies to some limited
offerings under Rule 504(b)(1), 17 CFR 230.504(b)(1), when an issuer has
satisfied state securities laws of specified types. See Securities Act Release No. 7644 (Feb. 25, 1999) [64
FR 11090]. The discussion in this section presumably also would apply to private
offerings conducted in reliance on the exemption from registration contained in
Section 4(2) of the Securities Act.
Municipal securities issuers and other municipal
securities market participants conducting online offerings are directed to our
discussion in n. 70 above of the issue that arises if the municipal securities
offering also involves an offering of a separate security that is not being sold
pursuant to the exemption from registration contained in Section 3(a)(2) of the
80 See the 1995 Release, n. 11 above, at Ex. 20.
81 Divisions of Corporation
Finance and Market Regulation interpretive letter IPONET (July 26, 1996).
83 See Rules 501(a) and 506(b)(2)(ii) of Regulation D, 17
CFR 230.501(a) and 230.506(b)(2)(ii).
84 See Division of Corporation Finance interpretive
letters Woodtrails - Seattle, Ltd. (Aug. 9, 1982)
(providing that no general solicitation exists when an issuer or any person
acting on its behalf made offers to investors in prior limited partnerships
sponsored by the general partner of the issuer); E.F.
Hutton Co. (Dec. 3, 1985) (providing that no general solicitation exists
when an offer is made to customers of a broker-dealer because of the broker's
pre-existing, substantive relationship with its customers; further, providing
that the requisite relationship could be established through a questionnaire
providing the broker-dealer with sufficient information to evaluate the
offeree's sophistication and financial situation). See also Division of
Corporation Finance interpretive letters H.B. Shaine
& Co., Inc. (May 1, 1987); Bateman Eichler, Hill
Richards, Inc. (Dec. 3, 1985).
85 These web sites would
also call into question the ability of an issuer to form a reasonable belief,
before sale, as to the qualification of the purchaser, which may be necessary
depending on the nature of the exemption. See, for
example, Rule 506(b)(2)(ii) of Regulation D. See also Section 3(c)(7) of the Investment Company Act, 15
86 See Securities Act Release No. 6825 (Mar. 15, 1989) [54
FR 11369] at n. 12 ("the staff has never suggested, and it is not the case, that
prior relationship is the only way to show the absence of a general
88 We encourage web site
operators offering these services to work with the Commission staff to resolve
any securities law issues raised by their activities. We understand that
securities lawyers may have interpreted staff responses to Lamp Technologies,
Inc. as extending the "pre-existing, substantive relationship" doctrine to
solicitations conducted by third parties other than a registered broker-dealer.
See Divisions of Investment Management and
Corporation Finance no-action letters Lamp Technologies,
Inc. (May 29, 1998) and Lamp Technologies, Inc.
(May 29, 1997). We disagree. In the Lamp
Technologies no-action letters, the staff of the Divisions of Investment
Management and Corporation Finance recognized a separate means to satisfy the
"no general solicitation" requirement solely in the context of offerings by
private hedge funds that are excluded from regulation as investment companies
pursuant to Sections 3(c)(1) and 3(c)(7) of the Investment Company Act, 15
U.S.C. §§80a-3(c)(1) and 80a-3(c)(7).
89 15 U.S.C. §78o.
90 See Section 15(a)(1) of the Exchange Act, 15 U.S.C.
91 See Section 3(a)(12) of the Exchange Act, 15 U.S.C.
§78c(a)(12). These "exempted securities" include instruments such as interests
or participations in any common trust fund or similar fund maintained by a bank,
or certain interests or participations in a single or collective trust fund or
securities arising out of a contract issued by an insurance company issued in
connection with qualified plans (see Section
3(a)(12)(A)(iii) and (iv) of the Exchange Act, 15 U.S.C. §§78c(a)(12)(A)(iii)
and (iv)), as well as mortgage securities (see
Exchange Act Rule 3a12-4, 17 CFR 240.3a12-4) and certain designated foreign
government securities (see Exchange Act Rule 3a12-8,
17 CFR 240.3a12-8).
92 17 CFR 230.251, et seq., 230.501, et seq. and 230.901, et seq.
93 17 CFR 230.144. The term
"exempted securities" for broker-dealer registration purposes under the Exchange
Act also does not include securities issued by religious, educational or
charitable organizations that are exempt from registration under Section 3(a)(4)
of the Securities Act, 15 U.S.C. §§77c(a)(4), or securities that are exempted
from registration by means of one of the transactional exemptions found in
Section 4 of the Securities Act, 15 U.S.C. §77d.
94 See the IPONET interpretive
letter, n. 81 above. The Division of Market Regulation's response in this
interpretive letter required that a registered broker-dealer maintain overall
supervision of IPONET's activities; otherwise, IPONET would have been required
to registered as a broker-dealer under Section 15(a) of the Exchange Act. The
Commission requests the Division of Market Regulation to consider whether the
activities of a web site operator, such as described in the no-action letters to
Lamp Technologies, Inc., see n. 88 above, require the web site operator to
register with the Commission as a broker-dealer.
95 Staff guidance is
available regarding whether a person is a broker-dealer subject to registration
with the Commission. Questions on this subject should be addressed to the Office
of Chief Counsel, Division of Market Regulation, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-1001, (202) 942-0073.
96 See Exchange Act Release No. 8363 (July 29, 1968) [33
FR 11150]. See also
Exchange Act Release No. 15194 (Sept. 28, 1978) [43 FR 46397]; Exchange Act
Release No. 6778 (Apr. 16, 1962) [27 FR 3991].
97 See In the Matter of Lowell H.
Listrom, 50 SEC 883, 887 n. 7 (1992).
98 See Division of Market Regulation Staff Legal Bulletin
No. 8 (Sept. 9, 1998), available on our Internet web site at
99 See the 1995 Release, n. 11 above, at n. 16 and the
100 See, for example, Richard S. Dunham, Across America, A Troubling "Digital Divide," Bus. Wk.,
Aug. 2, 1999, at 40; Michelle Singletary, "Digital
Divide" Isn't Just about Internet Access, The Wash. Post, Aug. 22, 1999, at
101 See Andy Serwer, A Nation of
Traders, Fortune, Oct. 11, 1999, at 116, 120 (quoting Charles Schwab CEO
David S. Pottruck as saying "`[c]ustomers want a variety of [information]
distribution channels . . . . face to face, the mail, the telephone and the
Web.'"). Additionally, the National Association of Securities Dealers, Inc. has
recognized that the Internet is not sufficient to serve as the sole means of
disseminating material corporate information. In January 1999, we issued an
order granting approval of a rule change by the NASD that stipulated that the
Internet may not be a substitute for the dissemination of corporate news to
security holders through traditional news services. See Exchange Act Release No. 40988 (Jan. 28, 1999) [64
FR 5331]. In that release, we explained that "[w]hile Nasdaq believes that it is
generally in the public interest to encourage widespread dissemination of
information to investors through the Internet, it also believes that it must
maintain a level playing field for all investors, including those who do not
have Internet access or who may not generally rely on the Internet as their
primary source of material corporate news."
102 See the 1995 Release, n. 11 above, at Ex. 24.
103 17 CFR 240.10b-10.
104 See Alexander C. Gavis & Scott Maylander, Mutual Funds and Electronic Delivery: Promise Versus
Reality, wallstreetlawyer.com, Feb. 1999, at 1.
105 For a discussion of the
impediments to electronic delivery, see n. 101 above
and the accompanying text.
106 We set forth
alternative procedures in the 1995 Release enabling an issuer to satisfy the
evidence-of-delivery element without obtaining informed consent, but only where
there is some other indication that the document was in fact received. See the 1995 Release, n. 11 above. None of these
procedures, however, permits an issuer or intermediary with delivery obligations
to assume consent based upon an investor's inaction. In contrast, the 1996
Release provided that an issuer could presume consent to electronic delivery by
employee-security holders who use the electronic mail system "in the ordinary
course of performing their duties and ordinarily are expected to log-on to
electronic mail routinely to receive mail and communications." See the 1996 Release, n. 15 above, Ex. 1. This
interpretation still stands, but we do not extend it to other situations.
107 We recently adopted
rules that allow issuers and broker-dealers to rely on implied consent to
"householding" of prospectuses and security holder reports; that is, delivery of
a single prospectus or report to two or more investors that are members of the
same family and share the same residential address. See Securities Act Release No. 7766 (Nov. 4, 1999) [64
FR 62540]. Under these rules, consent to householding can be implied only if
adequate advance notice is given to the investors and they do not object. Due to
concerns expressed by commentators, our rules permit householding to a shared
electronic address only if the investors consent in writing. Id. We have proposed similar rules for delivery of
proxy and information statements to households. See
Securities Act Release No. 7767 (Nov. 4, 1999) [64 FR 62548].
108 See the 1995 Release, n. 11 above, at n. 16 and the
109 Id. at n. 27. Companies conducting public offerings
must consider prospectus delivery requirements for secondary market trading
under Securities Act Rule 174, 17 CFR 230.174. Id.
110 See the 1995 Release, n. 11 above, at n. 27 and the
accompanying text and the 1996 Release, n. 15 above, at n. 17 and the
111 This could arise either
when an issuer is conducting an electronic-only offering, or when an issuer is
conducting a traditional offering, but certain members of the underwriting
syndicate that are online brokers offer only electronic delivery.
112 See Securities Act Rule 174.
113 See, for example, Mary Lou Peters, Avoiding Securities Law Liability for a Company's Web
Site, Insights, April 1999, at 16; Steven E. Bochner & Anita S. Presser,
Corporate Disclosure in the Electronic Age: The Web Site
-- Opportunities and Pitfalls, wallstreetlawyer.com, Apr. 1998, at 1.
114 See n. 66 above and the accompanying text.
115 See the Unger Report, n. 2 above, at 75.
116 This example and
Example 2 represent alternative ways of recording a telephonic consent. These
examples are not the only ways to comply with the interpretation.