By Stephen J. Schulte and Steven J. Spencer*

I. Introduction

To date, the Staff of the SEC has issued seven no-action letters relating to the transmission of road show presentations over the Internet or closed circuit systems:

This article reviews the seven no-action letters, synthesizing and comparing their respective approaches, and closes with some general observations.

II. Discussion

Except for Net Roadshow II, the Staff based its position in each no-action letter on the respective counsel's conclusion that a road show transmission, if structured appropriately, would not be a "prospectus", as defined in Section 2(a)(10) of the Securities Act of 1933 (the "Securities Act"), for purposes of Section 5 of the Securities Act. Because offerings utilizing Rule 144A of the Securities Act are structured to be exempt from the registration provisions of Section 5 of the Securities Act, the issue in Net Roadshow II was not whether the electronic transmission of a road show would be an illegal prospectus in violation of Section 5. Rather, the concern was that the offering, including the attendant road show, be conducted in a manner consistent with Rule 144A.

The following analysis focuses on the principal areas of concern in structuring Internet or closed circuit transmission procedures for road shows.

A. Limited Audience

A critical feature of each proposal was that only qualified investors would have access to the electronic road shows. Under PFN, only subscribers to the service-provider (e.g., broker-dealers and investment advisers) could view the electronic road shows. Under Net Roadshow I, Bloomberg, TFS and Activate.net, an institutional salesperson or underwriter would pre-clear the potential investors, which the no-action letters described as the types of investors that the underwriters customarily would invite to attend road shows.4 Net Roadshow II would limit the audience to (i) institutions for which the seller had confirmed its reasonable belief regarding their QIB status and (ii) employees or authorized agents of the service-provider or the seller.

Schwab proposed to expand the class of potential viewers to include retail investors with a designated level of trading experience or asset accumulation. Specifically, Schwab would permit its retail customers with at least 24 trades per year or $500,000 equity in household investment positions to view the road shows. Schwab also would grant access to certain independent investment advisers and their clients who, individually, would qualify for access.

B. Limited Viewings

Another common restriction among the no-action letters was limited viewer access to each road show presentation. PFN would limit each viewer to two transmissions of a given presentation. Net Roadshow I, Bloomberg and TFS, however, would adopt the "one day pass" approach. They would permit a viewer to watch a road show as often as desired during a single 24-hour period, and would take measures to ensure compliance with this restriction. Activate.net would use the one day pass approach for its delayed road shows, and would permit a viewer to watch a real-time road show only once. Under Net Roadshow II, the service-provider would furnish to the selling QIB, which would then assign to each viewer, a confidential password unique to a particular road show. The password would expire no later than the termination date of the related offering. Schwab proposed either to limit subscribers to two viewings of a road show or use the one day pass approach.

C. Primacy of Prospectus

Each of the first six proposals provided that transmissions would commence with a message reminding viewers of the primacy of the filed prospectus or, in the case of Net Roadshow II, the offering memorandum. Schwab simply indicated that it would provide a legend containing a similar reminder. Net Roadshow I and II (collectively, "Net Roadshow") and PFN also would include periodic "crawls" emphasizing the importance of reading the offering document. PFN, Bloomberg, TFS and Activate.net would require that transmissions conclude with a similar reminder, and would further require that viewers receive the document before being able to view a transmission.

For viewers that gave their consent to the lead underwriter, Bloomberg, TFS and Activate.net would deliver the offering document electronically. Bloomberg, TFS, Net Roadshow and Schwab also contemplated making the document available for viewing and downloading by those accessing the electronic road show. Net Roadshow and Schwab would display a hyperlink button that a viewer could click at any time during a transmission to link to the document. Further reinforcing the primacy of the offering document, Net Roadshow would require viewers to click a button acknowledging the document's importance before being able to view the road show. PFN did not specifically address electronic delivery of the offering document.

D. Prohibitions on Copying, Distributing or Transmitting

Under each proposal, the service-provider would require viewers to agree not to copy, distribute or further transmit any road show materials, except Net Roadshow II would permit copying and transmitting materials to employees or authorized agents of the QIB and Schwab would permit investment advisers to make the road shows available to clients that otherwise would be entitled to view them. Bloomberg, TFS and Activate.net would begin and end each transmission with a warning message to this effect. PFN and Net Roadshow would display reminders during the transmissions. Schwab would include a representation during its transmissions or as part of the log-in process that, by viewing a road show, the viewer would agree not to make the content available to those who are not eligible to receive it. Ensuring that viewers agree to its restrictions, Net Roadshow would deny access unless the viewer clicked a button indicating agreement. Net Roadshow I, Bloomberg, TFS and Activate.net also would incorporate technology to prevent viewers from copying, downloading or printing any portion of a road show transmission.

E. Content of Road Shows

Each proposal would require the content of the electronic road show to be the same as the live road show, with the caveat that the service-provider could edit out dead time and the issuer or underwriters could correct misstatements or mistakes. Consistent with the proscriptions of Section 5 of the Securities Act, each of the no-action letters relating to public offerings provided that no transmissions would occur before the issuer had filed a registration statement with the SEC. Each of these proposals also would make the issuer or underwriter responsible for ensuring that the road show content was not inconsistent with the filed prospectus. If information changed at any time after the road show was recorded, Net Roadshow, Bloomberg, TFS, Activate.net and Schwab would display a textual synopsis of the changes and an advisement that the viewer could contact the appropriate representative for further information about the changes. PFN did not address measures to indicate changed information.

In contrast to the other approaches, Bloomberg, TFS and Activate.net would include a feature that would allow viewers, if they wished, to interrupt the presentation and view less than the entire road show. The rationale of this feature was based on analogy to a live road show, where an audience member might arrive late or, at any time, leave the room and reenter.

In addition, Bloomberg, TFS, Activate.net and Schwab contemplated including an interactive element in their road shows. During real-time transmissions, viewers could submit questions to the sponsoring underwriter, which could answer those questions during the presentation.

F. Rule 134(b) Legend

Each of the no-action letters relating to public offerings provided that if the registration statement had not yet become effective, the transmission would display a Rule 134(b) legend to the effect that the securities could not be sold and offers to buy would not be accepted before the effective date. Net Roadshow I would include the additional feature of denying access unless the viewer clicked a button acknowledging the legend.

G. Fee Structures

Under the first six proposals, the service-provider would charge a flat fee for presenting the road show electronically, without regard to the size or success of the corresponding offering. As to viewer fees, Bloomberg and PFN would require viewers to pay regular subscription fees. Bloomberg also contemplated making transmissions available to non-subscribers on a pay-per-view basis. TFS and Activate.net indicated that they might charge viewers on a subscription or pay-per-view basis. Net Roadshow did not discuss how, if at all, the service-provider would charge viewers to receive the transmissions. Schwab did not address fee structures.

III. Observations

In theory, electronic road shows should provide a number of benefits to the investing community. For instance, they should level the playing field by enabling a larger and more diverse audience of qualified investors to participate in an important information-gathering process. Moreover, qualified investors should have more time to make fully informed investment decisions, since they will be able to view road show presentations earlier in the waiting period and likely will have more time to examine the offering documents. In addition, because electronic road shows are accessible by a much broader audience, potentially including the SEC and other regulators, presentations may become more precise and include less hyperbole.

Given the dynamics of the offering process and the increased use of electronic media, the securities industry should expect continued developments in the nature of road show presentations, including their content, degree of interactivity, and size and type of audience.5

* Stephen J. Schulte is a partner and Steven J. Spencer is an associate at the law firm of Schulte Roth & Zabel LLP. The authors thank William F. Sullivan for his work on earlier versions of this article

1. Bloomberg also contemplated transmitting road shows over the Internet at some future date. According to an article published in Financial NetNews, the company has announced its plans to do so. Bloomberg to Expand Electronic Roadshows to Net, Financial NetNews, Feb. 15, 1999.

2. Given the facts underlying Net Roadshow II, the letter does not apply to IPO road shows, although it is discussed in this article because it incorporates a number of the principles embodied in the other no-action letters relating to road shows.

3. Schwab indicated that it may offer road shows through arrangements with third-party vendors that already have adopted procedural safeguards in accordance with the Staff's no-action guidance. If using a third-party vendor, Schwab would abide by the procedural safeguards of the vendor (except that if the vendor's procedures for determining who could access the road show were more restrictive than Schwab's, Schwab would comply with its own procedures). If, instead of using third-party vendors, Schwab presented road shows itself, it would abide by the procedures outlined in part II of this article.

4. In February 1999, a Staff member informed Net Roadshow, Inc. that it could permit individual accredited investors to view electronic road shows, so long as the investors were individuals whom the underwriters normally would invite to a live road show. Allyson Vaughan, Firm Gets Approval From SEC to Include Individuals in Virtual Roadshows, Corporate Financing Week (February 8, 1999).

5. Last year, the SEC published a Proposing Release, designed to modernize and clarify the regulatory structure for offerings under the Securities Act. The Regulation of Securities Offerings, Securities Act Release No. 33-7606A (Nov. 13, 1998) (the "Aircraft Carrier Release"). Among the proposals in the Aircraft Carrier Release are various reforms regarding communications to investors and the market around the time of an offering. Certain of these reforms, if adopted, would dramatically alter how the Securities Act applies to electronic road shows.

Click Contact Contributor button to get in touch with the firm.