April 28, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0606
Re: File No. S7-31-99 (Response also filed via e-mail)
Dear Mr. Katz:
I am the Chief Executive Officer of VirtualFund.Inc. I write to comment on the Commission's proposed Regulation FD ("proposed Regulation FD" or "Regulation FD").
The Commission's proposed Regulation FD recognizes that disclosure of material, non-public information to a select few has been a serious problem. This problem is particularly severe for smaller issuers attempting to broadly and fairly distribute information and for smaller investors seeking the same access to information as institutions and larger investors.
These problems have existed in the past but have become especially pronounced with the advent of new, rapid tools for communications. Such tools allow analysts and their chosen clients to quickly use selectively-disclosed information in an otherwise unaware marketplace. This disparity of access to information causes harm to investors who do not enjoy equal access to information as these "chosen few."
While we applaud the Commission for its efforts to address these problems, we believe that the Commission's proposal does not go far enough. Specifically, we believe the Commission should recognize the now-dominant role of the Internet in information dissemination to the investing public, particularly as to smaller issuers.
We believe that the Commission should modify Regulation FD to recognize that the Internet, together and other electronic communication technology, are so widely used that they are adequate to serve, by themselves, as the sole means of communicating material information to investors. We believe that this recognition will be a key factor in the Commission's effort to "level the playing field" for all investors. Information released via the Internet allows for the simultaneous dissemination of material publicly-released information to all investors. We seek adoption of a "safe-harbor" provision that would protect an issuer from liability for non-material clarification and amplification statements and releases, whether on the Internet or through traditional means.
We believe that the Commission's current proposal, requiring material developments to be provided to the major news services via press releases is not appropriate. This method does little, if anything to provide investors with information regarding smaller companies. The major news organizations (both national and regional) routinely drastically shorten or fail to even report on small company news or press releases.
Thus, the investor is without access to information that he or she needs but that a small company cannot provide through traditional channels. It can be argued that the Commission's proposed approach makes sense since virtually every investor can now access the traditional news services via the Internet. But why require such small issuers to interpose such a service? If the small investors can access the news services via the Internet, they can just as easily access issuers' websites and other Internet-based sources of information.
To level the field between large and small issuers, the Company proposes that the Commission expand Regulation FD's proposed definition of "public disclosure" to include "web releases" on an issuer's Internet web site (either on the issuer's home page or a page referenced on the home page), as well as other Internet-based avenues of dissemination to investors. For example, if Regulation FD mandated that issuers (i) post their press releases on the issuer's web site (either on the issuer's home page or a page referenced on the home page), and on an Internet site within the domain of the issuer's trading exchange (see discussion below), and (ii) establish an email distribution list providing information to the major news organizations (Dow, AP, Reuters, etc.) and to online financial and investment sites (Bloomberg, Yahoo Finance, etc.), we believe such an approach would duplicate, in fact exceed, the efficiency of the current distribution system of releasing such press releases to the major news wires.
The current information dissemination problems faced by small issuers are not new. Small issuers have long faced less willingness by newspapers and other media outlets to communicate information about such issuers to the public.
In pre-Internet days, issuers coped with such lack of press coverage by coupling press releases to the media with mailing (U.S. Postal Service) copies of such press releases to market-makers (for their 15c2-11 "due diligence" files), current and former shareholders, second-tier media outlets, customers and vendors, and others who had expressed an interest in the issuer. Such dissemination methods were found to be adequate to satisfy the public information requirements of Rule 144.
Today, the efficiency of a release of information on the issuer's website, coupled with broadcast e-mail and electronic dissemination to traditional news sources far exceeds the efficiency of such methods. The Commission should recognize this, and find such releases satisfy the obligation of the issuer to publicly disseminate information.
Companies could establish an "opt-in" e-mail distribution system so that investors would receive distributed information in near real-time. We cite some statistics to demonstrate the efficiency of today's technology over traditional press releases:
In light of these statistics and our (and, we suspect, the Commission's and its staff's) own experience, it is hard to escape the conclusion that e-mail and web-based electronic communications have equaled, and in fact exceeded, the distribution power of traditional media.4
We believe that issuer websites should be allowed to be designated as a primary distribution point for material disclosures. Investors could "bookmark" the issuer's website to monitor company disclosures with a single "click." This approach would have the advantage of also allowing investors to easily review the issuer's other information, such as Exchange Act filings, consumer portions of the website, and other information included in the website, thereby increasing the overall breadth and thoroughness of information provided to the investor.
The Commission, in footnote 51 of the Regulation FD proposing release, expressed a concern about the effectiveness of distribution of information via the Internet:
"Moreover, simply putting information on a website does not alert investors that it is available."
Although this might be a true statement currently (we do not believe so), it would no longer be true once Regulation FD had been adopted by the Commission, thus placing the investing public on notice that issuers may use web-based publication as their primary method of dissemination of information.
If the Commission has concerns about the adequacy of web-based publication, it could adopt Regulation FD with a requirement that issuers to provide an e-mail notification to shareholders of record and others who had requested that the issuer provide them with information. This method would timely alert investors that the information is available. In fact, it would do so in a much more timely manner than traditional disclosure practices. VirtualFund submits that the investor is more likely to read an e-mail from the issuer than search the financial section of the morning's paper for a passing mention.
It is also interesting to note that the Commission itself refers the investing public to its own website to review company filings.5 While the Commission seems to view its own website as sufficiently "public," it would simultaneously deny that same ability to the companies it regulates. We believe that if the Commission can use its own website for "public disclosures," then it should deem companies seeking to communicate with the investors in the same manner to meet the Commission's "public disclosure" requirements.
Commissioner Unger has stated that
"I can even easily envision a SRO seeking to designate its own website as an acceptable channel through which listed companies can disseminate material news."6
We would wholeheartedly support requiring trading exchanges to host a "material news" site, within the Internet domain of the issuer's trading exchange. Issuers would post (or could be required by Regulation FD to post) their news releases on this news site. Investors, news organizations, and others could easily search through the news posting on such site for news-worthy items in much the same manner as they now sort through news wire press releases. The key difference from current practice is that investors would no longer need to be concerned whether they were searching the right source (Dow vs. Reuters vs. Bloomberg, etc.) but could, instead, be satisfied that all news releases regarding an issuer could be found in one place.
As Commission Unger has further stated,
"The Internet may push selective disclosure by the wayside. I have to believe that eventually, the Internet will be the only means of disclosure."7
While we do not believe that the day has yet come where the Internet is or should be the only means of disclosure, we firmly believe that the Internet has developed to the point where is should be an alternative means of disclosure in its own right without the need for simultaneous traditional press releases.
Even if the Commission decides to adopt Regulation FD substantially as proposed, we believe that the Commission should modify the proposed language to recognize that the Internet, without the need for traditional press releases, is an excellent avenue for corporate communications that clarify and amplify the Company's official releases on material information.
A press release, whether traditional or web-based, often only provides an overview of the most important, material issues. Often left out are the details that are important, but not material. Such details, although not material enough to justify inclusion in a press release, provide an additional layer of "granularity" (i.e., details which allow better understanding) to investors. This granularity serves to clarify, explain, and "fill in the gaps" of the information contained in the press release. In the past, this type of information was reserved solely for analysts and provided them with additional information that, while not material in its own right, was nonetheless helpful in their understanding of the issuer.
The Internet provides an effective means of widely disseminating this level of information to a large number of investors so that the markets can be more fully informed as to an issuer and its plans. Recognizing this avenue would be particularly important for smaller issuers that fall below the "radar" of analysts.
We understand that the issue of materiality will be a "slippery slope" for such non-traditional communications, but we believe that there must be a non-material level of information that provides additional granularity to already-issued, material, information. This distinction already exists, however, otherwise every time a director or officer of a company spoke to a single analyst or investor a press release would need to be issued.
This is obviously not the practice of the market currently. We seek adoption of a "safe-harbor" provision that would protect an issuer from liability for non-material clarification and amplification statements and releases, whether on the Internet or through traditional means. Such a provision would be particularly appropriate for Internet releases in light of the fact that Internet communications have equaled, in fact exceeded, the distribution power of traditional media.8
Accordingly, we request that the Commission revise proposed Regulation FD, Rule 101(e)(2) in the following ways:
1) Require exchanges and Nasdaq to provide a "material information service" as a clearing house for listed companies to disclose material information (such service would need to clearly state that the information disclosed by issuers was not verified, investigated or commented upon);
2) Provide that information was publicly available once listed companies posted such information on their corporate websites, on their exchange's (or Nasdaq's) clearing house, and transmitted such information via e-mail to investors and others who had signed up to the issuer's "opt-in" system to receive information via e-mail;
3) Adopt a "safe-harbor" provision that would protect an issuer (and its affiliates) from liability for non-material clarification and amplification statements and releases, whether on the Internet or through traditional means, and which would provide a "good faith" standard for determination of "materiality."
The three proposals should be adopted together to best use the Internet's ability to rapidly disseminate information to a wide audience. Any listed company that uses all three systems to distribute material disclosures would be considered to have meet the definition of "public disclosure" under the rule.
Thank you for your consideration of our proposals.
CEO VirtualFund, Inc.
4 Although we believe this conclusion is true as to dissemination of information about all issuers, we believe it to be particularly pronounced as to smaller issuers.
5 As an example, Rule 14a-12 requires a legend be placed on written communications used prior to the filing of a proxy statement. This legend must stathe that the disclosure documents can be found online at www.sec.gov.
6 Her remarks at the 19th Annual Ray Garrett, Jr. Corporate and Securities Law Institute, April 23, 1999.
7 Her remarks at the University of Texas School of Law 21st Annual Conference on Securities Regulations and Business Law, Feb. 18, 1999.
8 Although we believe this conclusion is true as to dissemination of information about all issuers, we believe it to be particularly pronounced as to smaller issuers.