Guidelines on the Use of Electronic Media


by Stephen I. Glover and Gillian McPhee

Note: This article is Chapter 15 of Securities in the Electronic Age: A Practical Guide to the Law and Regulation, Second Edition (John F. Olson and Harvey L. Pitt, Editors), published by Glasser LegalWorks.


The growing popularity of the Internet as a means of communication for issuers, market intermediaries and investors prompted the U.S. Securities and Exchange Commission to issue an interpretive release on April 28, 2000 establishing further guidelines on the use of electronic media by issuers.[1] These guidelines took effect on May 4, 2000. They principally address the use of electronic media in three areas: (1) electronic delivery of corporate communications; (2) Web site content; and (3) online offerings.

The April 2000 Release expands upon and clarifies interpretations articulated in two previous releases addressing the use of electronic media under the federal securities laws. The Commission first published guidelines in 1995 on the use of electronic media as a means of delivering information required under the Securities Act of 1933 (Securities Act), the Securities Exchange Act of 1934 (Exchange Act) and the Investment Company Act of 1940.[2] In 1996, the Commission published additional guidelines regarding the electronic delivery of information by broker-dealers and transfer agents under the Exchange Act and by investment advisers under the Investment Advisers Act of 1940 (Advisers Act).[3]

The October 1995 Release established that information distributed electronically satisfies the delivery or transmission requirements of the federal securities laws if the distribution results in delivery of information substantially equivalent to what the intended recipients would have received in paper form. The Commission suggested that issuers evaluate compliance with this standard in light of three concepts: (1) notice,i.e., the extent to which the electronic communication provides timely and adequate notice of the availability of the information; (2) access,i.e., whether the electronic delivery medium affords access to information comparable to that afforded by paper copies; and (3) evidence to show delivery, i.e., whether the issuer has reason to believe (based, for example, on written consent or actual evidence of receipt), that the means of electronic delivery selected would result in satisfaction of delivery requirements.

The May 1996 Release confirmed that the principles articulated in the October 1995 Release apply to broker-dealers, transfer agents and investment advisers using electronic media to meet delivery obligations to customers, securities holders and clients. The release set forth a list of Covered Delivery Requirements consisting of those Exchange Act and Advisers Act requirements that can be satisfied through electronic delivery in a manner consistent with the guidelines set forth in the release.

The various sections of this chapter will address the different substantive areas with respect to which the Commission offers interpretive guidance in the April 2000 Release.

1.02. Electronic Delivery

The Commission prefaces the guidelines on electronic delivery in the April 2000 Release with the statement that the existing framework in this area continues to work well and remains appropriate in the current technological environment.[4] The Commission states explicitly that issuers should continue to assess their compliance with the delivery requirements of the federal securities laws in light of the notice, access and delivery considerations established in the October 1995 Release and the May 1996 Release. The discussion in the April 2000 Release, therefore, is intended simply to clarify certain issues relating to electronic delivery.

[A]Telephonic Consent

The Commission clarifies in the April 2000 Release that telephonic consent to electronic delivery of issuer communications is permitted within certain parameters.[5]

In the October 1995 Release, the Commission indicated that one means of securing evidence of electronic delivery is to obtain an investors informed consent to receive information through a particular electronic medium.[6] The October 1995 Release further indicated that a consent is considered informed where the investor is told that a document will be delivered through a particular electronic medium and that there may be costs associated with delivery, such as the cost of online time, and where the investor is informed of the duration of, and types of documents covered by, the consent.[7] The Commission subsequently indicated in the May 1996 Release that informed consent could be obtained by written or electronic means.[8] This statement led to differing views among securities professionals as to whether, and under what circumstances, telephonic consent was permitted.

The April 2000 Release clarifies that an issuer or market intermediary may obtain consent telephonically as long as a record of the consent is retained.[9] The record should provide the same level of detail as a written consent, meaning that it should specify the medium of electronic delivery and indicate whether the consent is global.[10] As with any written or electronic consent, a telephonic consent also must be obtained in a manner that assures its authenticity. This would occur where an investor is well-known to the broker seeking the consent or the investor consents using an automated system accessed with a PIN number.[11]

[B]Global Consent

In the October 1995 Release, the Commission indicated that an informed consent to electronic delivery can relate to all documents delivered by a single issuer.[12] The Commission also indicated that a consent obtained by one person can be relied upon by another, so that issuers can rely on consents obtained by broker-dealers or other market intermediaries and vice versa.[13] These statements raised the question of whether investors holding securities of multiple issuers in a brokerage or other account could consent to electronic delivery of all documents of any issuer whose securities are held in the account.

The April 2000 Release clarifies that investors may give global consent to the electronic delivery of all documents of any issuer, so long as that consent is informed.[14] A global consent applies to all documents of any issuer in which an investor owns or buys stock through a broker-dealer or other intermediary. The release also clarifies that issuers and intermediaries may rely on consents obtained by third parties such as document delivery services. However, the issuer or intermediary bears ultimate responsibility for ensuring that the consent is authentic and that all required documents are delivered.[15]

In connection with the use of a global consent, the Commission suggests certain cautionary measures that should be taken because of the breadth of the consent. While every informed consent must specify the medium of electronic delivery, it is particularly important that a global consent identify the types of electronic media to be used.[16] Although this information need not be given on an issuer by issuer basis, investors cannot be required to accept delivery by additional media at a later date without additional consent.[17] A consent need not identify specific issuers; if it does, it may provide that additional issuers can be added in the future without further consent.

The April 2000 Release also cautions intermediaries to ensure that investors understand the global nature of the consent. A consent included as one provision in an agreement that an investor must sign to obtain other services might not fully inform the investor. According to the Commission, to best inform investors, broker-dealers should obtain the consent of a new customer through an account-opening agreement with a separate electronic delivery authorization or through an entirely separate document. The Commission expressly states that, except in the case of brokerage firms doing business exclusively online, if the opening of a brokerage account is conditioned upon an investor providing global consent, the consent would not be considered informed and evidence of delivery would not be established.[18]

The scope of a global consent necessitates that investors also should be advised of their right to revoke the consent at any time and to receive all documents covered by the consent in paper form. Because of the administrative difficulties that might arise by the revocation of consent with respect to some issuers and not others, intermediaries may require revocation on an all-or-none basis if this policy is disclosed at the time the investors consent is obtained.

[C] Use of Portable Document Format

The Commission has stated previously that investors who receive information electronically should have access comparable to that afforded by hard copies.[19] The use of a particular electronic medium may not be so burdensome that it prevents investors from having effective access to information.[20]

When delivering documents electronically, many issuers have refrained from using Portable Document Format (PDF) because it requires additional software and have instead used hypertext markup language (HTML), which does not. Issuers currently are not permitted to submit filings to EDGAR exclusively in PDF. In June of 1999, however, the Commission began permitting issuers to submit filings in HTML and offered them the option of submitting unofficial copies of their filings in PDF.[21]

The April 2000 Release confirms that PDF may be used to deliver documents if it is not so burdensome as to prevent access.[22] In practice, this means that issuers and intermediaries may use PDF to deliver documents to investors provided that they: (1) inform investors of the requirements for downloading PDF at the time of obtaining consent to electronic delivery, and (2) provide investors with necessary software and technical assistance free of charge. An issuer could satisfy the latter requirement by providing a hyperlink to a Web site where the software could be downloaded and a toll-free telephone number for technical assistance.[23]

The Commission reminds issuers and intermediaries that, in situations where one document must be preceded or accompanied by another, investors must have reasonably comparable access to both documents where the documents are delivered electronically.[24] For example, under Section 5(b) of the Securities Act, sales literature must be preceded or accompanied by a prospectus that satisfies the requirements of Section 10(a).[25] The Commission has indicated that a system that permits investors to view sales literature online and to download or request by mail a final prospectus by clicking on an icon in the sales literature would not afford reasonably comparable access because the system would not allow investors to view the final prospectus online and would provide no assurance that investors had downloaded or printed the prospectus before viewing the sales literature.[26] The language of the April 2000 Release suggests that issuers using PDF to satisfy their document delivery obligations should, at a minimum, ensure that they provide investors with the technical information outlined in the release.

[D] Clarification of the Envelope Theory

The October 1995 Release included examples suggesting that documents in close proximity to each other on the same Web site and documents hyperlinked together will be considered delivered together as if they had been mailed in the same envelope.[27] This is known as the envelope theory of electronic delivery.

The envelope theory has been a source of concern for issuers in registration. Some issuers have expressed concern that the posting of a Section 10 prospectus on a Web site would make everything on the Web site part of the prospectus. Others have worried that information outside the prospectus, but physically located near the prospectus on the Web site, would be considered free writing, or an offer to sell, offer for sale or offer under Section 2(a)(3) of the Securities Act by a means other than a prospectus meeting the requirements of Section 10 of the Securities Act.[28]

While the principles articulated in the April 2000 Release focus on issues that arise in the context of registration, the Commission indicates that these principles apply by analogy to all documents that must be filed or delivered under the federal securities laws.[29]

[1]Information Included in the Prospectus

The April 2000 Release clarifies that information on a Web site will be considered part of a prospectus only where an issuer (or someone acting on the issuers behalf, including a market intermediary that has delivery obligations) acts to make it so.[30] As discussed in Section 15.03[B] infra, where an issuer includes a hyperlink in its prospectus, the Commission believes that it is appropriate for the issuer to assume responsibility for the information because the issuer has exhibited an intent to make the hyperlinked information part of its communication with the market.[31] The hyperlinked information becomes part of the prospectus, must be filed with the Commission as part of the prospectus and will be subject to liability under Section 11 of the Securities Act.[32] In light of this, a company wishing to post a prospectus on its Web site should segregate the prospectus in a separate area of the Web site.

An issuer may include the Web site address (the uniform resource locator or URL) of the Commissions Web site or its own Web site without these Web sites being considered part of the issuers prospectus, provided that the issuer: (1) takes steps to ensure that the URL is inactive (that is, that an investor cannot reach the Web site by clicking on the address included in the prospectus); and (2) includes a statement to the effect that the URL is an inactive textual reference.[33] Where an issuer does not intend to provide hyperlinks to third-party Web sites, it should take care to ensure that any third-party Web site addresses included on its own Web site are not active. Many word processing programs automatically convert URLs into active hyperlinks, so issuers should take care to disable any Web site addresses to which they do not intend to hyperlink.

Where an issuer hyperlinks in the other direction, from an external document to its prospectus, the external document will not be deemed part of the prospectus, although both documents will be viewed as having been delivered together. An issuer could, however, be subject to liability with respect to the external document under Section 12 of the Securities Act, depending on whether the external document is itself a prospectus.

The Commissions guidance on hyperlinks does not apply to documents filed on EDGAR. While hyperlinking to external documents from a disclosure document is permissible when the disclosure document is posted on an issuers Web site, hyperlinks may not be embedded in a disclosure document filed on EDGAR.[34] Issuers may include hyperlinks to sections within a single EDGAR document, from the body of an EDGAR document to its exhibits, and to other EDGAR filings on the Commissions Web site.[35]

[2] Free Writing

The April 2000 Release also clarifies that the posting of information on a Web site in close proximity to a prospectus, without more, does not constitute impermissible free writing. An issuers Web site content must be examined in its entirety to determine whether it contains free writing, without regard to whether, or where, the prospectus is posted on the Web site.[36] The proximity of information on an issuer's Web site to a prospectus will continue to be relevant for purposes of determining whether the information in question and the prospectus were delivered together.[37] As an initial matter, a company wishing to post a prospectus on its Web site should segregate the prospectus in a separate area of the Web site. Companies should also be mindful of the Commissions guidelines on issuer communications during a registered offering, as discussed in Section 15.03[B] infra.

[3]Municipal Securities Issuers

The April 2000 Release also discusses the application of the Commissions guidelines on hyperlinking to participants in municipal securities offerings.[38] Rule 15c2-12 of the Exchange Act requires municipal securities underwriters in primary offerings to obtain from the issuer and send to its customers a final official statement.[39] Because a final official statement may consist of one or more documents, where a municipal securities issuer posts the statement on its Web site and hyperlinks to other Web sites, there may be an issue as to what is included in the final official statement that the underwriter must send to its customers.

The Commission indicates in the April 2000 Release that a municipal securities underwriter may rely on an issuer to identify which of the documents posted on and hyperlinked from the issuers Web site constitute the preliminary, deemed final and final official statements. Hyperlinks embedded in an official statement, however, will be considered part of the statement even if the issuer has not specifically identified the hyperlinked information. If a municipal securities offering is subject to Rule 15c2-12, the paper and electronic versions of the preliminary, deemed final and final official statements must be identical. Even where an offering is exempt from Rule 15c2-12, the official statements and other disclosures pertaining to the offering are subject to anti-fraud liability.


Although the Commission provides guidance as to two issues regarding Web site content in the April 2000 Release, it states as a preliminary matter that the federal securities laws apply in the same manner to Web site content as to any other statements made by an issuer.[40] In addition, while the Commissions guidance focuses on the responsibilities of issuers, the Commission encourages broker-dealers and investment advisers to consider carefully their responsibilities in this area.[41]

[A] Issuer Responsibility for Hyperlinked Information

The April 2000 Release clarifies that an issuer may be liable under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder for third-party information to which the issuer hyperlinks on its Web site.[42]

Concerns about issuer liability for the adoption of information have arisen as a result of case law and statements by the Commission suggesting that an issuer may be liable for distributing analyst reports on the theory that the distribution is equivalent to an implied representation by the issuer that the information in the reports is accurate.[43] According to the April 2000 Release, liability for hyperlinking to third-party information, including analyst reports, may arise where the issuer adopts or endorses information on a hyperlinked Web site.[44] Once the threshold question of adoption is answered, liability will be determined in accordance with the standards of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.[45]

The Commission declines in the April 2000 Release to adopt a bright-line rule for determining whether an issuer has adopted hyperlinked information. Instead, it sets forth a non-exclusive list of factors that it would consider relevant in making such a determination. These factors include (1) the context of the hyperlink, (2) the risk of confusion, and (3) the presentation of the hyperlinked information.

[1]Context of the Hyperlink

The context of the hyperlink includes what the issuer says about the hyperlink and what is implied by the context in which the hyperlink is placed.[46] For example, an issuer that hyperlinks to a Web site that it describes as providing the best description of the issuers business would be viewed as endorsing the hyperlinked information on that site. Likewise, where an issuer uses a hyperlink to provide support for a statement on its Web site (for example, by hyperlinking to an online magazine that touts the issuer as the leading manufacturer of its product), the hyperlinked information would be attributed to the issuer.

Significantly, the Commission states in the April 2000 Release that when an issuer embeds a hyperlink in a document required to be filed or delivered under the federal securities laws, the issuer will be deemed to have adopted the hyperlinked information. Where an issuer in registration establishes a hyperlink from its Web site to information that meets the definition of an offer, offer to sell, or offer for sale under Section 2(a)(3) of the Securities Act, a strong inference will arise that the issuer has adopted the hyperlinked information.

[2]Risk of Confusion

The Commission also considers the likelihood of investor confusion about the source of hyperlinked information as relevant to a determination as to whether an issuer has adopted the information.[47]

A determination as to the risk of confusion will be affected by the presence or absence of cautionary statements informing an investor about the source of the hyperlinked information. An issuer is less likely to be viewed as having adopted the information where the information is accessible to an investor only after viewing an intermediate screen that clearly indicates the investor is leaving the issuers Web site and that the hyperlinked information is not the issuers. Statements disclaiming responsibility for and/or endorsement of hyperlinked information may also minimize the risk of confusion, although disclaimers will not be sufficient where the circumstances otherwise indicate that the issuer has adopted the hyperlinked information.[48]

The risk of investor confusion is higher where an issuer frames or inlines information from a third-party Web site. Framing imports information from a third-party Web site into the Web site being accessed and displays it within an on-screen border, or frame.[49] Inlining functions in a similar manner, but with no visible border.[50] Both of these practices may obscure the fact that the information being viewed on an issuers Web site is not that of the issuer, but rather information located on the Web site of a third party.

[3]Presentation of the Hyperlinked Information

An issuers presentation of hyperlinked information on its Web site will also be relevant to the issue of whether it has adopted the information.[51] The selective use of hyperlinks tends to suggest adoption of the hyperlinked information because it represents an attempt to direct investor attention to some facts about the issuer and not others. As a result, an issuer may be viewed as having adopted hyperlinked information where the issuer hyperlinks only to certain information that is not representative of the universe of information available or establishes and terminates hyperlinks to particular Web sites depending on the nature of the information available on those sites.

The depiction of a hyperlink on an issuers Web site will also be relevant. Any actions to differentiate a hyperlink from other information or hyperlinks on an issuers Web site, by altering the size, color or font size of the hyperlink, may be seen as an improper attempt to influence an investors decision to view the hyperlinked information and as evidence of the issuers endorsement of the information.

[4]Using Hyperlinks Effectively

While issuers in registration and issuers considering public offerings should be especially careful about the content of their Web sites,[52]companies that are not in registration also should consider carefully the use of hyperlinks on their Web sites. To limit the risk that third-party information will be attributed to companies because of hyperlinks on their Web sites, companies should:

Avoid hyperlinking selectively to Web sites that contain only positive statements about the company and its business or Web sites that, when viewed in the aggregate, would not present a fair and accurate picture of the company.
Avoid using language around the hyperlink that suggests that the company is endorsing the statements on the hyperlinked Web site.
Use a combination of click-through screens and disclaimers. Click-through screens will inform investors that they are leaving the companys Web site and proceeding to another site. An appropriate disclaimer will inform investors that a hyperlinked Web site is not under the companys control, that the company is not responsible for and does not endorse information on the hyperlinked site, and that investors choosing to access third-party Web sites through a hyperlink do so at their own risk.
Avoid framing or inlining information from a third-party Web site. Both of these practices import information from a third-party Web site into the site being accessed and may obscure the fact that the information being viewed on the companys Web site is not that of the company, but rather information located on the Web site of a third party.

[B]Issuer Communications During a Registered Offering

In November, 1998, the Commission published a release that proposed fundamental changes to the registration process for public offerings, including changes to the rules governing communications by issuers in connection with their offerings.[53] More recently, the Commission adopted rules that relaxed issuer communications in connection with cash tender offers, mergers, exchange offers and proxy solicitations.[54]These rules permit issuers to communicate information outside a Section 10 prospectus.[55] As a result, information relating to a business combination may remain on an issuers Web site provided that it is filed in accordance with the requirements of Securities Act Rule 425.

The Commission states in the April 2000 Release that it will continue to consider the proposals in the Aircraft Carrier Release as part of a broader regulatory review of restrictions on communications.[56] The Commission is also separately considering the use of road shows.[57]Due to the increasing use of Web sites in ordinary business communications, however, issuers have sought guidance from the Commission as to the types of Web site communications that are permissible when they are in registration.

The April 2000 Release indicates that information posted on the Web site of an issuer in registration, including hyperlinked information, is subject to the same restrictions as other types of communications under Section 5 of the Securities Act.[58] Under the principles discussed in Section 1.02[D][1] above, where an issuer hyperlinks to information on a third-party Web site and the information constitutes an offer to sell, offer for sale or offer,[59] this will raise a strong inference that the information is attributable to the issuer for purposes of determining whether the issuer has complied with the requirements of Section 5 of the Securities Act.[60] Before filing a registration statement, issuers should review information, both on their own Web sites and on any Web sites to which they offer hyperlinks, to ensure that there is nothing on the Web sites that might constitute an impermissible offer under Section 5 of the Securities Act.

The Commission encourages issuers in registration to maintain ordinary-course business communications with shareholders, customers, suppliers and others. According to the April 2000 Release, ordinary-course business and financial information may include advertisements; reports required to be filed under the Exchange Act; proxy statements, annual reports and dividend notices; press releases regarding business developments; answers to unsolicited telephone inquiries about business matters from securities analysts, financial analysts, shareholders and participants in the communications field that have a legitimate interest in the issuers affairs; and shareholder meetings. Information permitted under the safe harbors established by Securities Act Rules 134 and 135 also may be posted on a Web site.[61] The safe harbors available to broker-dealers under Rules 137, 138 and 139 of the Securities Act do not allow issuers to provide the same information that broker-dealers may provide under these safe harbors.[62]

The April 2000 Release also states that non-reporting issuers should comply with its guidance on ordinary-course business communications. Non-reporting issuers with a history of making such communications over their Web sites should be able to continue providing business and financial information on their Web sites while preparing to do an initial public offering. On the other hand, a non-reporting issuer that establishes a Web site in anticipation of or in conjunction with its first registered offering may need to apply the Commissions guidance more strictly. Such an issuer would not have a history of making ordinary-course business communications through its Web site. In the absence of such a history, the issuers Web site communications may condition the marketplace and investors may be less able to distinguish an offer to sell the issuers securities from the issuers business or financial information or promotional activities.

Companies in registration and companies considering public offerings should be careful about the content of their Web sites. Materials on a Web site should be dated, and the Web site should be reviewed on a regular basis to update and remove outdated information or place it in an archival section of the Web site. Companies in registration can continue to post ordinary business communications on their Web sites, provided they have established a history of providing such communications over the Internet.

1.04 Online Offerings

[A]Online Public Offerings

The increasing use of the Internet, email and other electronic media to solicit investor interest in public offerings of securities has afforded individual investors greater access to investment opportunities. While the Commission views this as beneficial, it expresses concern in the April 2000 Release that investors still lack sufficient information to understand fully the online public offering process and that, as a result, they may be making hasty and uninformed investment decisions.[63]Grow your online business with a Business Loan from First American Merchant

[1] Fundamental Legal Principles

The April 2000 Release does not set forth specific procedures to be followed by issuers and broker-dealers conducting registered offerings online.[64] Rather, the April 2000 Release indicates that the Commission will analyze this area in connection with its review of filings and may take future regulatory action. Nevertheless, the Commission restates two fundamental legal principles, which it indicates should guide the development of such procedures. Issuers and broker-dealers can use any combination of media, whether electronic, paper or otherwise, to communicate with prospective investors as long as their communications comply with these fundamental legal principles.

The first of these principles is that participants in a registered public offering are prohibited from selling or making contracts to sell securities prior to the effectiveness of the registration statement.[65] Likewise, no offer to buy can be accepted, and no part of the purchase price can be received, prior to effectiveness.[66] The second fundamental legal principle is that written, television and radio offers may not be made outside of a prospectus meeting the requirements of Section 10 until delivery of the final prospectus has occurred.[67] Once a registration statement is filed, limited written communications are permitted under Securities Act Rules 134 and 135;[68] oral offers are permitted as well.[69] Once a registration statement is effective, an issuer may distribute sales literature or other written or broadcast materials provided they are accompanied or preceded by a final prospectus.[70]

[2] Wit Capital Corporation

The Commission suggests that until further regulatory action has been taken, issuers conducting initial public offerings over the Internet may look to the procedure blessed by the Commission in its no-action letter to Wit Capital Corporation.[71] The no-action letter permitted Wit Capital Corporation to act as an underwriter or dealer in an online, firm commitment initial public offering provided that it followed the procedure outlined in the letter. Under this procedure, once a registration statement is filed:

a dealer circulates an e-mail including information permitted under Rule 134 and a hyperlink to a preliminary prospectus posted in a segregated area, or cul de sac, on the dealers Web site;
investors having accounts with the dealer can make offers to buy using subscription documents posted in the cul de sac;
approximately two days before effectiveness, the dealer sends an e-mail notice to investors requesting affirmation of offers to buy;
after effectiveness but before pricing, the dealer sends an e-mail notice to investors who have affirmed their offers to buy indicating that the offer is about to price and that, unless the investors withdraw, the dealer can accept their offers; and
once the offer is priced and allocations are made, notices of acceptance are sent, followed by confirmations and the final prospectus.

Companies seeking to conduct registered offerings online should be aware that the Commission will be carefully scrutinizing the procedures employed in these offerings. Companies should consider clearing any proposed procedures with the Commission in advance.

[B] Online Private Offerings under Regulation D

[1] General Solicitations

The Commission has previously indicated that the use of the Internet in a private offering of securities under Regulation D may involve general solicitation or advertising, in contravention of Regulation D. In the October 1995 Release, the Commission indicated that the placement of offering materials on a Web site that is publicly available would involve a general solicitation and disqualify the offering from being private within the meaning of Regulation D.[72]

In 1996, the Commission offered additional guidance in the area of online private offerings in a no-action letter issued to IPONET.[73] The Commission staff agreed that the activities in IPONET did not involve a general solicitation because prospective investors could access a password-restricted Web page on IPONETs Web site only after the companys affiliated broker-dealer determined that the investors were accredited or sophisticated under Regulation D. They could purchase securities only in offerings posted on the restricted Web page and only after being qualified as accredited or sophisticated and opening an account with the broker-dealer.

The Commission indicates in the April 2000 Release that since issuing the IPONET letter, it has observed a number of practices that it characterizes as potentially involving general solicitations.[74] These include Web sites that allow investors to certify themselves as accredited or sophisticated by checking a box and Web sites operated by third-party service providers that are not registered as or affiliated with broker-dealers.

The position taken by the Commission in the IPONET letter was based on the well-established principle that a general solicitation does not exist where an issuer or broker-dealer has a pre-existing, substantive relationship with prospective investors.[75] The April 2000 Release highlights the existence of such a relationship as a means of avoiding a general solicitation. According to the Commission, the role of the typical broker-dealer in making recommendations to its customers, and the requirement that a broker-dealer deal fairly with its customers, imply the existence of such a relationship.

The Commission acknowledges in the April 2000 Release that previous staff interpretations of what constitutes a pre-existing, substantive relationship have been limited almost exclusively to the broker-dealer context. The Commission also indicates that this is a fact-intensive inquiry and that there may be circumstances in which someone other than a registered broker-dealer could establish the existence of such a relationship. It encourages third-party Web site operators offering accreditation services to look to the Commission staff for assistance in resolving securities law issues raised by their services.[76] Significantly, however, the Commission also states that its no-action letters to Lamp Technologies, Inc. (Lamp) should not be read as extending the pre-existing substantive relationship doctrine to third parties other than registered broker-dealers.[77]

In its no-action letter to Lamp on May 29, 1997,[78] the Commission staff took the position that Lamps procedure for furnishing information about private hedge funds to potential investors would not constitute a general solicitation. Lamp, which was in the business of operating Web sites, proposed to establish and administer a Web site containing information about certain private hedge funds. To access this information, a potential subscriber would be required to (1) complete a generic questionnaire that would permit Lamp to determine whether it was an accredited investor under Regulation D and a qualified eligible participant (an investor having a two million dollar investment portfolio, or QEP) under the Commodity Exchange Act, and (2) pay a monthly subscription fee. Once Lamp had determined that the subscriber was qualified and the subscriber had paid its fee, the subscriber would be given a password to access the fund information. Each subscriber was required to observe a waiting period before purchasing the securities of any fund to ensure that Lamps qualification of the subscriber would not be deemed a solicitation for a particular fund. One year later, in a subsequent no-action letter,[79] the staff indicated that it would not object if Lamp eliminated the subscription fee and the QEP requirement, so long as it continued to require that investors be accredited within the meaning of Regulation D.

The Commission states in the April 2000 Release that the Lamp letters recognized a separate means of satisfying the no general solicitation requirement under Regulation D that is limited to offerings by private hedge funds.[80] Based on this statement and the remaining discussion of the pre-existing substantive relationship doctrine, the April 2000 Release suggests that, in the absence of facts that strongly point to the existence of a pre-existing, substantive relationship, broker-dealers should not be involved in online offerings under Regulation D. Where a broker-dealer is not used, and in particular, where an issuer permits prospective investors to self-accredit, the issuer not only runs the risk of engaging in a general solicitation in violation of the requirements of Regulation D, but also raises doubts as to whether it can form a reasonable belief that prospective investors are qualified to participate in an offering. Issuers using the Internet in connection with private placements should consider the regulatory status of those entities involved in the process of certifying investors as accredited or qualified under the federal securities laws.

[2]Registration as a Broker-Dealer

The April 2000 Release cautions Web site operators to consider whether their activities require them to be registered as broker-dealers.[81]Section 15(a) of the Exchange Act makes it unlawful for any broker or dealer to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security other than certain exempted securities, without first registering with the Commission.[82]

The exempted securities for which broker-dealer registration under the Exchange Act is not required do not include securities issued under Regulations A, D, or S or privately placed securities that are restricted under Rule 144. As a result, Web site operators that act as brokers in connection with offerings of securities exempt from registration under the Securities Act are not exempt from having to register as broker-dealers. It is unclear whether the activities of a Web site operator like Lamp, which was not acting as a broker, would require that it register as a broker-dealer. The Commission asks the Division of Market Regulation to consider this issue in the April 2000 Release.[83]

[C]Broker-Dealer Capacity

The Commission has indicated that broker-dealers must have adequate facilities and personnel to execute and consummate securities transactions promptly.[84] In the context of electronic media, the April 2000 Release encourages broker-dealers to ensure that they have sufficient operational capability to handle periods of high-volume trading.[85]

1.05 Technology Concepts

Given the rapid pace at which technology is evolving, the guidance offered by the Commission in the area of electronic media also will continue to evolve. One purpose of the April 2000 Release is to enable the Commission to solicit comment on specific issues that it anticipates may arise as technology develops further.[86] While the comment period expired on June 19, 2000, the Commissions discussion of these issues suggests that they may be the subject of future regulatory action.

[A] Access Equals Delivery

In the October 1995 Release, the Commission stated that issuers and market intermediaries with delivery obligations would need to continue to make information available in paper form until electronic media was more universally accessible and accepted.[87] The Commission indicates in the April 2000 Release that, even though Internet access is more prevalent now than it was in 1995, it is still too early to move from the present system of requiring document delivery in paper form to an access-equals-delivery model.[88] Under an access-equals-delivery model, investors could be presumed to have Internet access, so that electronic delivery could be accomplished solely by posting a document on a Web site.

According to the Commission, the widespread adoption of an access-equals-delivery model would be inappropriate at this time because not all investors have access to the Internet and those who do are unlikely to rely on it as their sole means of obtaining information. Notwithstanding this, the Commission requests comment in the April 2000 Release on whether there are circumstances under which, consistent with investor protection, it would be appropriate to rely on an access-equals-delivery model.

[B] Electronic Notice

The Commission has stated previously that issuers and market intermediaries must provide direct notice to investors regarding the availability of disclosure documents that are delivered electronically.[89] Posting a notice on an issuers Web site or publishing the notice in a newspaper is not sufficient to alert investors to the availability of disclosure on a Web site.[90] Similarly, it has traditionally been the view of the Commission that posting a message in an investors account on the Web site of the investors broker-dealer does not provide sufficient notice of the availability of disclosure documents. The message must be forwarded directly to the investor.[91]

In the April 2000 Release, the Commission indicates that it continues 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.[92] With regard to the specific practice of posting account messages on Web sites, however, the Commission requests comment on whether it should reevaluate its position or continue to require delivery of notice directly to investors.

[C] Implied Consent

The Commission acknowledges in the April 2000 Release that one of the most significant barriers to the use of electronic delivery by issuers and market intermediaries is the difficulties posed by obtaining investor consent.[93] In the wake of such difficulties, some issuers and intermediaries have proposed that they be allowed to rely on implied consent to provide evidence of delivery with respect to electronic disclosure. An implied consent to electronic delivery is a consent presumed from an investors failure to object following notice that an issuer or market intermediary intends to deliver documents electronically.

As a general matter, the Commission states in the April 2000 Release that it does not believe that it would be appropriate for issuers and market intermediaries to rely on implied consent.[94] According to the Commission, investors would be significantly and adversely affected by implied consent because in some instances, their failure to consent is purposeful, rather than the result of having simply ignored requests for consent. The Commission has previously permitted use of implied consent in carefully circumscribed circumstances. For example, a company may presume consent by its employees-stockholders where these employees use email in the ordinary course of performing their jobs and they are expected to access their email routinely.[95] The April 2000 Release requests comment as to whether there are additional circumstances under which issuers should be permitted to rely on implied consent.

[D] Electronic-Only Offerings

As discussed in Section 15.05[1] supra, in the October 1995 Release, the Commission stated that issuers and market intermediaries with delivery obligations would need to continue to make information available in paper form until electronic media was more universally accessible and accepted.[96] The 1995 Release also expressly permitted electronic-only offerings, that is, offerings in which participation is conditioned upon investors consenting to electronic delivery of all documents in connection with the offering.[97]

Whether an offering is electronic-only or not, the Commission has also stated that, as a matter of policy, an investor that chooses electronic delivery must be given documents in paper form if the investor specifically requests it.[98] An investor is entitled to paper copies without regard to whether, or when (relative to the delivery of the disclosure) it has revoked its consent to electronic delivery.[99] Through a series of detailed questions, the April 2000 Release requests comment on whether, and under what circumstances, paper copies should be required in electronic-only offerings.

[E] Access to Historical Information

It has been suggested that a statement posted on an issuers Web site is republished every time it is accessed by an investor or each day that it appears on the Web site. Each republication could be viewed as potentially giving rise to liability under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Commission seeks comment in the April 2000 Release on some of the ways to facilitate the availability of historical information over the Internet consistent with concerns about liability under the federal securities laws.[100]

[F] Communications When in Registration

The Commission believes that its guidance regarding the types of communications in which companies may engage while in registration extends to reach the Web site content of most companies that conduct business over the Internet. This guidance may be of lesser utility to a new generation of companies that not only do business over their Web sites, but whose Web sites are their businesses. When such companies are in registration, they face the issue of how to maintain their ordinary-course communications with the marketplace in a manner that is consistent with their obligations under Section 5 of the Securities Act. This issue may be of particular concern to mutual funds because they continuously offer and sell their shares to the public and thus, always maintain effective registration statements for this purpose.

In the April 2000 Release, the Commission seeks comment on some of the ways in which issuers whose Web sites are their businesses can maintain ordinary business communications while in registration and also comply with their obligations under Section 5 of the Securities Act.[101] As discussed in Sections 15.03[A][1] and 15.03[B] supra, the April 2000 Release establishes that, where an issuer in registration hyperlinks from its Web site to information that meets the definition of an offer, offer to sell, or offer for sale under Section 2(a)(3) of the Securities Act, a strong inference will arise that the issuer has adopted the hyperlinked information.[102] In the case of mutual funds that hyperlink to third-party Web sites, the Commission asks whether there are any facts and circumstances that should overcome this inference.

[G] Internet Discussion Forums

The Internet provides a forum for chat rooms, bulletin boards and other interactive discussions about issuers and their securities. The Commission requests comment in the April 2000 Release on several issues relating to Internet discussion forums.[103] These include (1) whether and how Internet discussions affect an issuers stock price; (2) whether issuers and broker-dealers that host online discussions should adopt and maintain best practices for participation in these discussions and, if so, who should establish these practices and what should be included in them; and (3) whether issuers have established policies governing employee participation in discussion forums.


The use of the Internet by issuers and investors alike has transformed the marketplace and had the beneficial effect of promoting transparency, efficiency and liquidity in the capital markets. As technology continues to evolve and more Americans obtain access to the Internet, electronic media will no doubt continue to affect the ways in which market participants communicate with each other and disseminate information. The Commissions views on the use of electronic media, as articulated in the October 1995 and May 1996 Releases, and the interpretive guidelines published in the April 2000 Release and discussed in this chapter, should serve as a comprehensive foundation for companies seeking to satisfy their obligations under the federal securities laws. As technological developments give rise to novel methods of communication that neither regulators, businesses, nor investors have yet envisioned, additional regulatory action is certain to follow in order to ensure that the benefits of technology are harnessed to achieve the Securities Acts fundamental purpose of providing full and fair disclosure to all investors.