By Stephen J. Schulte and Steven J. Spencer
This article was originally published in the Fall 1999 issue of Securities Law Developments.
The Internet’s ease of use and ability to transmit information broadly and efficiently have revolutionized corporate communication. Over 98% of the 1999 "Fortune 500" companies have Web sites. A typical corporate site includes or hyperlinks to a variety of data, including product and service information, financial and general corporate information, press releases, stock quotes, management presentations and EDGAR filings.
Currently, securities practitioners advising companies with respect to Web site design and maintenance must work within the structure of a limited number of SEC pronouncements and interpretations that trace back to the Commission’s October 1995 Release regarding electronic delivery. Although these pronouncements have been an excellent starting point for applying Federal securities law within the context of electronic communication media, in particular the Internet, many issues remain unresolved. As the Web continues to become more accepted in the corporate community, novel legal issues will continue to arise, unintended consequences will occur and further guidance will be necessary. In the meantime, we are left to interpret the available SEC pronouncements and, where appropriate, read between the lines.
This article addresses selected Federal securities law issues that public companies should consider when creating and maintaining their corporate Web sites. Each topic includes the authors’ suggested "best practices." The reader should recognize, however, that no topic discussion stands alone, and that some of the considerations addressed in one topic interrelate with those discussed in others. This article concludes with the authors’ recommended list of core practices and guidelines for a company to incorporate into its Web site policy.
1. Selective Disclosure
Concerns.
Whether material information posted on a Web site, without further public
dissemination, constitutes selective disclosure.
Current Approaches.
The Internet is not yet accepted as a medium that will satisfy the legal requirements for
public dissemination of material information. This view is consistent with the positions
of the SEC and the NASD. For example, NASD Interpretation IM-4120-1, Disclosure of
Material Information, provides that NASD member companies may not disseminate material
information over the Internet before traditional news vendor services receive it. The
Commission’s Order approving the NASD Interpretation noted that the Interpretation
should protect investors who do not have Internet access or who otherwise continue to rely
on traditional news services for their corporate news. Specifically, the Order stated that
"material news may not be released on the Internet prior to its receipt by
traditional news services thereby helping to ensure that material news is not selectively
disseminated." Release No. 34-40988 (January 28, 1999). See also New York Stock
Exchange Listed Company Manual, Section 202.06(A), stating that "[a]ny release of
information that could reasonably be expected to have an impact on the market for a
company’s securities should be given to the wire services and the press ‘For
Immediate Release.’"
Best Practices.
Until such time as the SEC and the self-regulatory organizations adopt the view that the
Internet is an adequate legal means for publicly disseminating material information, a
company should ensure that any material information posted on its Web site is the subject
of a concurrent or prior Exchange Act filing or press release.
2. Disclaimers
Concerns.
Whether disclaimers are effective in reducing potential liability for certain information
disclosed on or hyperlinked from a Web site.
Current Approaches.
The vast majority of companies use disclaimers in one form or another throughout their Web
sites. Locations of disclaimers vary, but there are three principal approaches:
- providing the full text of the disclaimer on the same screen as the information to which it relates;
- using a "speed bump" or "click-through" that pops up on the screen, forcing the viewer to acknowledge the disclaimer before accessing the information; or
- creating a hyperlink from the information to the disclaimer.
Companies that hyperlink to a disclaimer typically place the link either:
- next to the subject information;
- on a menu bar typically located on the top or left side of the screen; or
- at the bottom of the screen, with a label such as "terms and conditions" or "important legal information."
Best Practices.
Generally, companies should use disclaimers liberally. To be effective, a disclaimer
should be concise and clearly drafted. In addition, the disclaimer or its hyperlink should
be prominently located and readily visible in respect to the subject information. If
hyperlinking to a disclaimer, the link should be underlined or otherwise clearly
identified as a link and should be meaningfully captioned.
In most circumstances, a disclaimer may be more effective if it is on the same screen as the information to which it relates or if a viewer must click through the disclaimer before accessing the information. For example, in addressing offshore Internet offers, the SEC’s March 1998 Release stated that "if the disclaimer is not on the same screen as the offering material, or is not on a screen that must be viewed before a person can view the offering materials, it would not be meaningful." Although not all disclaimers lend themselves well to a click-through approach, the obvious advantage to this method is that it requires specific acknowledgment. Ultimately, the most appropriate placement and substance of a disclaimer will turn on the nature of what the company is disclaiming. As discussed in the next section, however, there may be circumstances under which a disclaimer, regardless of prominence or wording, will not be effective.
3. Off-Site Hyperlinking
Concerns.
Whether a hyperlink from a company’s Web site to a third-party’s site may result
in the company’s adoption or implicit endorsement of the linked site’s content
and, consequently, liability for the linked site’s inaccuracies and outdated
content.
Current Approaches.
Companies are increasingly using hyperlinks to third-parties’ sites to provide
viewers with access to a wide variety of information prepared or maintained by others,
including:
- articles and other publications;
- stock prices and related information;
- consensus earnings estimates; and
- EDGAR filings.
Instead of hyperlinking to this information, some companies post it directly on their Web sites. The NASD has issued an interpretive letter that gives some comfort to NASD member companies linking to other sites, provided that certain requirements are satisfied. NASD Regulation, Inc. Interpretive Letter to Craig S. Tyle, Investment Company Institute (November 11, 1997) (available at http://www.nasdr.com/2910/2210_01.htm).
Best Practices.
Use of disclaimers is critical when providing hyperlinks to third-parties’ sites.
Although any disclaimer must be tailored to the linked material, a typical disclosure
would include a warning that the viewer is about to leave the company’s site, that
information on the linked site has been prepared by a third-party and that the company
does not monitor, endorse or accept responsibility for the content of the linked site. In
addition, linked sites should open in a new window, visually separating them from the
company’s site. "Framing," the practice of opening the content of another
site within the frame of the company’s site, can increase a company’s potential
liability for adoption of the material on the third-party’s site.
Disclaimers, of course, are not bullet-proof. For example, the effectiveness of any disclaimer may be impaired if the company knew, or should have known, that the linked information contained material inaccuracies. In addition, companies may incur the attendant risks of misleading or unbalanced presentations if they provide links exclusively or predominantly to favorable material, while unfavorable but credible information also is available.
Companies should not post or hyperlink to analysts’ reports or link to the Web site of an analyst’s investment bank. If management elects to inform investors which analysts cover the company, the posting should be limited to a list of all the analysts and, at most, their telephone numbers and affiliations. In addition, all references to analyst coverage should be subject to a non-endorsement disclaimer.
Some companies’ Web sites now provide access to consensus earnings estimates, whether by direct posting or hyperlink. It is questionable whether any disclaimer can negate the implicit endorsement that results from posting or linking to estimates. Moreover, once a company provides such information, it may implicitly create an undertaking to continue doing so. This could raise additional issues if, at a later date, management knows that the estimates posted at that time are materially inaccurate.
4. Press Releases
Concerns.
The principal issues regarding the posting of press releases relate to their accuracy,
whether the company has a duty to update them and whether the company has protected any
forward-looking statements by properly invoking the safe harbor under the Private
Securities Litigation Reform Act of 1995.
Current Approaches.
Most companies post their press releases. Practices vary as to whether companies remove
outdated or otherwise "stale" releases from their sites, maintain them in an
archive or leave them as posted. Best Practices. No press release should be posted on a
Web site until the company publicly disseminates it by traditional means. All posted press
releases should be dated and, when no longer current, removed or archived. In addition,
projections in a press release should be covered by an appropriate safe harbor
disclaimer.
5. Updating, Correcting and Archiving
Concerns.
Whether it is necessary to update material information posted on a Web site. Since
information on a Web site may be deemed to be continually "republished" or
"refreshed," whether it is necessary to identify information that is not
current. An additional concern is whether updating or correcting material information on a
Web site may trigger selective disclosure issues if the information is not also publicly
disseminated through traditional means.
Current Approaches.
Most companies do not disclaim a duty to update. Many attempt to identify, whether by
specific disclosure, dating, archiving or otherwise, news releases that may be
"stale." As to other posted information, however, no common practices have yet
developed.
Best Practices.
It is not clear whether there is a duty to update information that, although correct when
made, has become inaccurate as a result of subsequent events. Many practitioners are of
the view, however, that there is a duty to update such information when it remains
"alive" and continues to impact the market. Accordingly, it is important for
companies to take steps to clarify what material information may no longer be
current.
Companies should date all material information when they post or modify it, or otherwise indicate as of when it speaks, and should disclaim any duty to update. In addition, companies either should delete outdated information or move it to an archive. Use of an archive permits viewers to continue accessing information that may have historical or other value even though the company has indicated that the information is no longer current. If a company updates or corrects material information on its site, it must take steps to ensure that it properly disseminates that information to the public through traditional means and on a timely basis.
6. Management Presentations and Analyst Conference Calls
Concerns.
Whether conference calls and other management presentations accessible from a
company’s Web site raise selective disclosure issues. Whether the company has
properly invoked the Reform Act safe harbor for projections, including whether the
conversion of an oral presentation to a posted transcript or recording will nullify the
safe harbor disclaimer for oral projections.
Current Approaches.
According to a recent study by the National Investor Relations Institute
("NIRI"), slightly more than 10% of public companies surveyed provide real-time
Internet access to their analyst conference calls, and a significant number of other
companies indicated that they are considering doing the same. In many cases, companies
restrict the press and general public to access on a listen-only basis. Some companies
post transcripts or recordings of completed presentations. There are no clear trends
regarding the practice of invoking the safe harbor for projections in management
presentations.
Best Practices.
The SEC is particularly sensitive to selective disclosure issues arising from analyst
conference calls and other management presentations. The concern reaches beyond the
Internet context, and includes telephone conferences, "blast faxes," and other
communications. In a recent speech, Arthur Levitt, Chairman of the SEC, referred to
selective disclosure by companies to analysts as a "stain on our markets." He
appealed to companies, "in the spirit of fair play: make your quarterly conference
calls open to everyone, post them on the Internet, invite the press." If a company
elects to provide access to management presentations through its Web site or otherwise, it
must ensure that all material information discussed is the subject of prior or concurrent
public dissemination (whether by press release or Exchange Act filing). It is also
important to recognize that the safe harbor disclaimer for oral projections does not cover
written projections, and appropriate modification of the disclaimer is necessary when an
oral projection is converted into a writing.
7. Forward-Looking Information and the Reform Act Safe Harbor
Concerns.
How a company may properly take advantage of the Reform Act’s safe harbor when
posting forward-looking information on its Web site.
To understand the principal issues, it is important to review briefly the requisite disclaimers of the safe harbor. In general, to take advantage of the safe harbor, projections must be (1) identified as forward-looking statements, and (2) "accompanied by" meaningful cautionary statements identifying important factors that could cause actual results to differ from those projected. Where the forward-looking statements are oral, the "accompanied by" requirement can be satisfied if (i) the company states that actual results may differ materially from those projected and that information regarding factors that could cause the results to differ is contained in an identified written document that is readily available, and (ii) the referenced document contains cautionary statements that would satisfy the safe harbor for written projections. For written projections, the cautionary statements actually must accompany the projections.
The principal issues regarding proper invocation of the safe harbor involve:
- the continued adequacy of the disclaimer when an oral projection is converted into a writing by posting it on a Web site;
- whether the "accompanied by" requirement may be satisfied by hyperlink; and
- whether, under any circumstances, the safe harbor may be available for projections in third-party materials that a company is deemed to have adopted.
Current Approaches. Companies take various approaches regarding invocation of the safe harbor. Some commence management presentations by reading a cautionary statement that, if transformed into a writing, would satisfy the safe harbor for written forward-looking statements. Others post written cautionary statements on their Web sites in a manner that either requires viewers to access the statements before proceeding to the presentation or permits viewers to access the statements via hyperlink from the presentation. Some companies make no provision for modifying the disclaimer for oral projections when the oral projections are converted into writings. Other companies make no attempt to invoke the safe harbor.
Best Practices. As a general matter, written projections must be accompanied by the requisite cautionary statements. While there is no authority that hyperlinking satisfies the "accompanied by" requirement, an increasing number of practitioners are becoming comfortable with this approach, provided that the links are clearly identified and prominently visible. Referencing the "risk factors" section of an Exchange Act filing, without more, would not appear to satisfy the requirement.
It is important to recognize that oral projections may be converted into writings when posted on the Internet. Section 2(a)(9) of the Securities Act defines the term "written" to include "any means of graphic communication," and Securities Act Rule 405 defines "graphic communication" to include "magnetic impulses or other forms of computer data compilation." In a recent speech, SEC Commissioner Laura S. Unger stated that "[t]oday, in theory at least, the Commission’s definition of ‘writing’ capture[s] all electronic communications." Once an oral presentation becomes a writing, it must actually be accompanied by the required meaningful cautionary statements in order to satisfy the safe harbor. One practical solution is to read the meaningful cautionary statements as part of the presentation. Another is to provide them on the Web site, through a hyperlink or otherwise.
8. Chat Rooms, Bulletin Boards and E-Mails
Concerns.
Whether a company may be liable for statements made by an employee communicating in a chat
room, bulletin board or via E-mail. Whether selective disclosure, adoption and related
issues arise if a company sponsors, hyperlinks to or directly participates in chat room,
bulletin board or E-mail exchanges.
Current Approaches.
Relatively few companies sponsor, link to or participate in chat rooms or bulletin boards.
A growing number of companies have implemented specific policies prohibiting employees
from participating in on-line discussions about the company. Some companies even prohibit
employees from maintaining their own Web sites.
In general, most companies that accept E-mail from Web site viewers do not respond to inquiries that are not product or service related. In fact, some specifically state that they are not legally obligated to read, act on or respond to E-mail communications.
Best Practices.
As a general rule, companies should not sponsor, link to or participate in chat rooms or
bulletin boards. There are, of course, companies that do so as an integral or
complementary part of their business. These companies, at the least, should make it clear
that they do not undertake to review or edit third-party messages and should disclaim
endorsement of or other responsibility for the content of messages posted by others. It is
also advisable, and consistent with current practice, for a company to develop and post
chat room rules. Typically, these rules would cover matters of conduct, including
restrictions on content and language.
Companies should implement a written policy prohibiting employees from discussing corporate matters in chat rooms, bulletin boards or E-mails. Moreover, a policy of employee silence provides the added benefit of protecting the company from the potential liability that can arise even when well-intentioned employees seek to correct rumors or defend the company. In situations where the company may feel the need to respond on-line to rumors or negative postings, management must recognize that there are serious potential consequences, including those relating to selective disclosure and creating an expectation that the company will continue to monitor and correct inaccurate third-party postings.
A company that maintains on its Web site a means for viewers to send it E-mail messages should evaluate any corporate responses in light of potential liability for selective disclosure and the duty to update.
9. Gun-Jumping on the Web
Concerns.
Gun-jumping refers to activities during the pre-filing period that are deemed to be offers
in violation of the Securities Act because they contribute to conditioning the market or
otherwise arousing interest in a company or its securities. Gun-jumping has taken on a new
dimension with the advent of the Internet, since Web site content must be analyzed in the
context of potentially conditioning the market.
Current Approaches.
To date, no common practices have developed with regard to monitoring Web sites for
gun-jumping activities. In fact, many companies are not even sensitized to this
issue.
Best Practices.
Whether activities constitute gun-jumping depends on the surrounding facts and
circumstances. There are no bright line tests. A company, however, does not need to shut
down its Web site to avoid gun-jumping. In fact, it should continue "business as
usual," including the advertising of products and services. Throughout the
registration period, however, it is imperative for management, in conjunction with
corporate counsel, to review Web site content to ensure that it is devoid of promotional
material that could be deemed to condition the market. The central analysis turns on a
judgment call as to whether any changes to a site’s design or content would stimulate
interest in the company or its offering in violation of the Securities Act.
Conclusion and General Web - Policy Advice
This article has highlighted a number of Federal securities law issues for public
companies to consider when developing and maintaining a presence on the Internet. To avoid
the various pitfalls inherent in a corporate Web site, it is important for companies to
implement a written policy that will serve as a guide for managing the site. Although each
company must tailor the policy to its individual needs and circumstances, it should
consider the following core practices and guidelines:
- Identify the team responsible for creating and maintaining the Web site. This group should include key corporate personnel, including representatives from the company’s various business units, as well as the financial, investor relations and legal departments.
- Sensitize the group to Web site concerns, and identify one or more team members to keep abreast of legal and regulatory developments impacting Web sites.
- Establish clear lines of responsibility among team members for approving and monitoring Web site content, including an ongoing assessment of the issues identified in this article.
- Review all posted material regularly, not just the investor relations section, with the same degree of care as is applied to Exchange Act filings, press releases and other publicly disseminated documents. The focus should be on continued accuracy, including removal or "tagging" of information that is not current.
- Monitor all hyperlinks to ensure that they take the viewer to the intended material.
- Develop monitoring procedures to ensure compliance with the Web site policy.
Stephen J. Schulte
(212) 756-2401
stephen.schulte@srz.com
Steven J. Spencer
(212) 756-2327
steven.spencer@srz.com
