PRACTICAL POINTERS FOR MANAGING WEB SITES TO MEET '34 ACT RESPONSIBILITIES ^[1]

Web sites are a cost effective way to communicate with shareholders, analysts and potential investors. Dissemination is instant and global, making worldwide publicity at minimal cost a reality. Using a web site, a company can take its road shows to dozens of locations at a fraction of the cost it would incur in visiting invitees at multiple sites. Voting via the Internet speeds tallying votes while decreasing costs.^[2] On-line shareholder meetings widen participation without significantly increasing expense. A company web site can provide numerous opportunities for publicizing information about that company's products and services, and about corporate developments. Potential suppliers, clients and customers can be directed to the appropriate individuals to contact for questions, saving company employee time and expense, thereby simultaneously increasing efficiency and enhancing goodwill.

Each of these uses has enormous potential for fast, inexpensive and effective communication. In connection with use for securities offerings and communicating with current and potential shareholders and investors, however, realizing this potential has risks. Most of these risks arise from the fact that in the SEC's view, information posted on a web site is (unless designated as archival or historical), continuous publication. In the absence of requiring a password or taking other measures to limit access, such publication is also untargeted. Missteps may subject a company to liability as a result of action by the SEC. Company web sites are also likely to be perused by private litigants and their lawyers, for example, in connection with pending or contemplated shareholder derivative suits.

As a result, companies using web sites for securities offerings, for communications with shareholders and potential investors, and for general institutional advertising, need to educate themselves to the rules as they apply to electronic communications, and establish and enforce guidelines to maximize the likelihood that their web site publications produce the desired results and minimize the risk that their web sites will support allegations of securities law violations.

What to Post and When to Post It - Understanding the Risks

Because placing information on a web site is publication and dissemination is instant and global, any information placed on a web site is deserving of the same level of review as that type of information receives in connection with its traditional distribution. If traditional distribution is limited, unless distribution from the web site is similarly limited, the information placed on the web site deserves additional review, that is, the same level of review as is given other information which is "made public".

If certain categories of information not subject to legal review are included on a web site, the categories should be clearly defined and materials placed on the web site in those categories (and without legal review) should fall clearly within one or more of the defined categories. When feasible, it is advisable, at least initially and until the parameters of various categories are clearly established, for legal counsel to review all materials posted on a company's web site.

Should a Company Post Its Press Releases?

Press releases are the traditional means of disseminating information by publication. Posting them on a web site seems a natural way to enhance dissemination; an effective alternative for small companies whose activities are not regularly followed in the press, and a supplementary method for disseminating information relating to companies whose activities are usually covered in the press. When published in newspapers, the newspaper, not the releasing company, determines whether or not the release will be published. If it is published, dissemination generally occurs within a day or two of the date of the press release. Thus, press releases disseminated in the traditional manner have a limited "life". When posted on a company's web site, however, it is the company, not a third party, which decides whether to publish, and there is no inherent limit on the duration of dissemination. A press release will remain on the company's web site until it is removed.

When considering whether to post a press release on its web site, the releasing company, not a third party, makes the decisions - what to post, when to post it, and when to remove it. With company control, comes the temptation to post good news and not post bad news. Such a policy clearly risks violating federal securities laws as well as rules of self-regulatory organizations (the New York Stock Exchange and NASD).

A company has several choices in determining a policy regarding handling of press releases. It may decide to post all its press releases, and leave them posted for a specified period of time. If it chooses such a policy, it may also decide to announce the policy on its web site. It may also provide an archive of "old" press releases. Because the SEC takes the position that web site posting is continuous publication, "posting and forgetting" may provide support for unhappy investors' claims that the company provided misleading information or that by posting information without provision for distinguishing historical from current information, the company incurred an obligation to update and failed to do so. It may be argued that dating all information is sufficient, and it may be. Segregating historical from current information, however, provides a company with an additional margin of safety, thereby reducing the risk that outdated information will be reasonably relied upon by regulatory entities, investors and potential investors, or other interested persons.

If a company decides to post some but not all releases, having objective guidelines for determining which ones can reduce the likelihood that the company will be accused of posting only "good" news and avoiding dissemination of "bad" news, thus giving a false impression of what is happening in the company. Content-related guidelines which fail to consider cumulative results of their implementation may, over time, result in an inappropriately rosy (or gloomy) picture of a company's status, thereby providing ammunition for plaintiffs in shareholder derivative suits.

Whether a policy is established to post all press releases for a certain number of days and then remove them, or the policy is to make a decision based on the contents of each release, or other standards are established, with regard to web site postings, it is incumbent on the company to establish some policy for dealing with posting and removing or archiving press releases from the company web site.

Resolving the issue by not posting any press releases may also have risks. If and to the extent including press releases becomes standard either in a company's industry, or for domestic companies of similar size, not posting press releases may be seen as indicating there have been none. Thus, to the extent their inclusion is expected, if they are not included, an affirmative statement that as a matter of corporate policy the company does not post press releases on its web site is advisable.

Whatever the specifics, having a web site requires a company to take responsibility for posting information and for removing it in a timely manner and according to methods which do not result in the removal itself creating erroneous impressions and rumors.

Minimizing the Risk of Class Action Suits Resulting from Web Site Postings Involving Financial Projections

When a company's stock price plummets unexpectedly, plaintiffs' counsel in such suits is likely to scrutinize the allegedly offending company's web site for misleading or inadequate information. Attention must therefore be given to what such counsel is likely to find.

In recent years, companies have been encouraged by financial analysts and the SEC to make financial projections. In some cases, projections are required in connection with '34 Act reporting, as for example, to indicate the likely outcome of existing trends.^[3] In addition, investment analysts make projections based on company filings, reports, meetings with analysts and press releases. Forecasts which turn out to be erroneous, particularly forecasts which turn out to be overly optimistic, may send the price of a company's stock plummeting, and give rise to disappointed investors filing class action lawsuits.

The risks of web site publication thus include increased risk of shareholder lawsuits resulting from publication of allegedly misleading or inadequate information, particularly in connection with forecasts which turn out to be overly optimistic. These increased risks may arise in several ways, including intertwining of sales and financial information, intertwining of financial information and analysts' reports, and failure to update information which has become stale or inaccurate due to subsequent developments.

Often, a company will have its most recent SEC filings - reports on Forms 10-K, 10-Q and 8-K - on its web site. A company may also post its annual report, often carefully not "filed" except for financial statements and Management's Discussion and Analysis. Particularly when the annual report is more than six months old, the CEO's letter to shareholders, and other semi-promotional descriptions of the company's business and operations, may be overly optimistic or, due to corporate or industry changes, inaccurate. Products may have been withdrawn, line extensions may have been added, divisions may have been sold, shrunk or acquired, etc. Including language that the information speaks as of its date and advising web site visitors where additional materials may be found is advisable as a reminder that the materials are dated and have limitations.

A web site that includes language separating promotional information from straight financial information, and clearly distinguishes between them, will have fewer risks than one which does not. Similarly, a web site which regularly removes stale information and updates information on its site will increase its accuracy and thus reduce the risk that its postings will be used against it.

Companies that are followed by analysts may wish to provide links to analysts reports, particularly favorable analysts reports. Doing so, however, may be seen as "adopting" those reports with which it links, thus placing the company's imprimatur on their accuracy and providing a basis for plaintiffs' lawyers to argue that the company is responsible for a favorable report by an independent analyst, including any inaccuracies such report contains. Thus, linking only with favorable reports is unwise.

One solution is to provide links to reports of all analysts who follow the company, regardless of whether the reports are favorable or unfavorable, with a caveat that such links are provided for the convenience of persons who may be interested, that the reports are written by independent analysts, and that the company takes no responsibility for such reports, including without limitation any inaccuracies which they may contain. Another solution is to provide a list of such analysts, but no links, again with warning language advising that the company provides the information for convenience and takes no responsibility for their accuracy. A third solution is to provide neither links nor a list. It may however be difficult to prevent others from establishing links to a company's web site. It is, therefore, advisable to disavow responsibility for analysts' reports whether or not the company facilitates linking with them.

Where forward looking information is included on a company's web site, inclusion of risk factors is also advisable. If, for example, a company posts its10-K report on its web site, a reference or link to that section of the report which discusses risk factors is advisable. Where the 10-K is not posted but promotional information is, consideration should be given to including risk factor information from the 10-K. Such a practice is particularly desirable when a company's stock is known to be high risk, and the company anticipates that it will appeal to people likely to learn about it through its web site (e.g., "high tech" companies or others who initially offered their stock for sale via a company web site, or anticipate doing so in the foreseeable future).

Recent informal statements by members of the SEC staff have indicated that general references to risk factors stated in a 10-K may be insufficient to bring a company within the "safe harbor" for forward looking statements. Accordingly, companies should give careful consideration to the structure of specific links and references. Making it easy to link to specifically-applicable information can provide an additional margin of comfort.

"Chat Rooms," "Newsgroups," and Cyberspace Rumors

The generally-accepted response to whether a company should sponsor a "chat room" for shareholders and prospective investors is a resounding, "No." Chat rooms, which provide facilities for discussions in "real time" ("chat"), have risks for the provider. If a company provides a chat room, case law indicates that it may be safer not to monitor discussions, because monitoring may impose responsibility for content, which a chat room sponsor cannot control until after the fact. On the other hand, if a company does not monitor its chat room content, it may find itself sponsoring discussions which disparage the company or its products, or which is libelous, or otherwise unpleasant for visitors, all of which may create ill will and reflect badly on the company.

Some unpleasantness can be eliminated by scanning for foul language (but never underestimate the creative spelling abilities of determined users), but as a matter of public relations, the risks of unmonitored chat are likely to be seen as unacceptable.

Unlike chat in chat rooms, discussions in newsgroups do not occur in real time. A newsgroup provides for submission of information to a site which "posts" the information for visitors to see. Responses, if any, are sent to the site for posting, and one follows a "thread" in lieu of having the real time discussion which occurs in chat rooms. Newsgroups can be either moderated or unmoderated. A "moderated newsgroup" is one in which the entity providing the site reviews all messages prior to posting them. Such review provides the sponsoring entity with an opportunity to eliminate materials which may be unfavorable, libelous, or otherwise objectionable.

The advantage of a moderated newsgroup is that it can be used to respond to visitor comments and queries in a controlled and pre-screened way without revealing the wording of the original queries or the identity (and implicitly the affiliation) of their authors. Such moderated newsgroups, however, impose burdens and responsibilities on a the sponsoring entity. For a company, balancing its own best interests, which means posting favorable comments, with fairness to participants, who will want to feel that they have a fair "hearing" regardless of content, is likely to prove difficult, and is fraught with perils regarding timing and disclosure. Uncomfortable questions or unfavorable comments which are not posted may give rise to further, and angry comments. Answering questions may involve making statements before a company wishes to do so. A company can decide when to send out press releases, but faced with newsgroup queries, it may find itself having to choose between responding to queries and sending out press releases prematurely, or appearing to ignore queries and generating ill-will. Answering queries on an individual basis, as is customarily done by old-fashioned customer service replies, is a more limited response, and less likely to generate continuing discussion, than posting responses. Under most circumstances, the risks of undertaking the tasks of sponsoring a newsgroup far outweigh the possible benefits, and companies are therefore well-advised to avoid shouldering the burdens of sponsoring either a "chat room" or a moderated (or unmoderated) newsgroup.

Companies may, however, find they must deal with cyberspace rumors originating from chat rooms and newsgroups sponsored by others. Market rumors are not a new issue. With the rise of investor-oriented web sites and Internet chat rooms and newsgroups however, rumors may move quickly through a much broader community than in the past. It may, therefore, be advisable for a company to keep itself apprised of what is being said about it in chat rooms and newsgroups.

At the same time, corporate employees and others who have inside information about a company's products or services, or confidential legal, financial or other material information, need to be aware that disclosure of such information by actively participating in a chat room, newsgroup or other type of cyberspace forum is a violation of confidentiality obligations, and can do serious damage to the subject company, as well as the disclosing person's career. Corporate policy should include a reminder that corporate employees must maintain confidentiality regarding employment-related information, limit their participation in chat room and newsgroup discussions to companies other than their employer and its clients, customers, suppliers and others about which they have confidential information. With regard to chat room and newsgroup discussions involving their own company or its customers, suppliers or others about which they have confidential information acquired in the course of their employment or professional capacity, company policies need to make clear that employees and other insiders may monitor discussions about such companies; but they should not participate in such discussions regarding activities in their respective companies or those with whom it has relationships, lest they find themselves the source of rumors or improper disclosures.

In addition to reminding those with confidential information of the risks of online disclosure, a company may wish to provide guidance for responding to situations in which a company employee whose affiliation is or may be known to other online discussion participants is asked for information. Traditionally, publicly-trades companies refer inquiries from the press and investors and potential investors to a designated person or department for reply. Implementing that policy in connection with real time chat may however be inadequate to squelch such rumors at an early stage. Accordingly, a company will want to consider how it wishes to instruct its employees regarding the appropriate response to market rumors in a chat room, balancing the goal of stopping rumors as quickly as possible with the need to have consistent and knowledgeable responses to market rumors, which may or may not reflect cyberspace rumors. Typically, a corporation's standard corporate response to inquiries about rumors is either, "no comment" or, more categorically, "As a matter of corporate policy, we do not comment on market rumors." Whether persons other than those designated to communicate with the press and inquiring investors will be instructed to respond to market rumors in online chat rooms is an issue which companies will, increasingly, need to consider in connection with formulating corporate guidelines and policies for employees.

Brokerage Firm Chat Rooms

Unlike companies offering products or services, brokerage firms, particularly if they offer on-line trading, may find that they must offer a chat room in order to compete. (Newsgroups present similar problems, and the conclusions in this section apply to all types of on line discussion arrangements, whether implemented as chat rooms with real time discussion or newsgroup discussions in which comments and responses are followed by following discussion threads.) Also unlike other types of organizations, broker-dealers are obligated to report complaints in accordance with governing self-regulatory organization rules,^[4] and therefore, broker-dealers must make arrangements to maintain records of "chat" and monitor their chat rooms. Broker-dealers are also at risk that their chat rooms will be used to tout a stock or manipulate its price, giving them a second reason to monitor their chat.

There are some practical steps which broker-dealers can take to reduce their risks and the burdens of monitoring. For example, they can require that chat room participants identify themselves and sign an agreement that outlines their responsibilities. They can, and will in general, want to prohibit their own brokers from participating in the firm's chat room to avoid the appearance of having special information or touting or soliciting. Such a non-participation policy also avoids problems arising from the requirement that written communications with clients must be precleared. ^[5]

Because of the problems which may arise when brokers participate in chat rooms, broker-dealers will generally prohibit their own brokers from participating in their chat rooms, and use independent people not otherwise involved in the brokerage business to monitor their chat rooms. The firms do, however, need to train these monitors to ask questions likely to expose stock price manipulation attempts. They will also want to obligate monitors to report potentially libelous or otherwise unacceptable communications. Finally, broker-dealers need to make arrangements to monitor the monitors to assure they are doing their monitoring jobs.

Broker-dealers will also want to post disclaimers to remind people that the source of chat room information is not the firm, is not controlled by the firm and may not even be known to the firm, that the information in the chat room may be false or inaccurate, and that investment decisions should not be made solely on information obtained through chat room chat.

Web Sites Require Management - Start a Check List

Having a web site requires on-going attention to its contents, whether changed or unchanged. We live in a dynamic world. Information on a web site is continuously disseminated. Companies which have web sites which disseminate inaccurate, incomplete or inadequately current information can expect to find themselves at greater risk of suffering challenge from disappointed shareholders, prospective shareholders, and dissatisfied clients and customers than companies which actively and thoughtfully manage their web sites to provide timely information to interested visitors.

Some Non-Securities Law Risks

Able management of corporate web sites includes being aware of not only securities law issues, but marketing issues, customer relations issues and other legal and related concerns. Confidential information which becomes available on the Web, and thus the Internet, is no longer confidential. Trade secret protection is not available to information once it is available on the Internet. On the other hand, publication on the Internet does not mean that copyright protection is lost. Copyright laws apply when copyrighted materials are made available on the web. Thus, permission to incorporate copyrighted materials of others as a part of a company's web site may have to be obtained.

Where a web site includes an interactive facility enabling visitors to ask questions about a company's product or services, good customer relations requires that the company respond promptly to queries and complaints posted at its site. If a company cannot respond promptly, it may be better not to provide the facility and avoid the ill will resulting from long delayed responses to questions and comments. Two weeks between the time a query is sent via U. S. mail and the time an answer is received seems reasonable. Waiting two weeks for a response to an e-mail query may not.

Some Thoughts on '33 Act Risks

When a company is in the process of making a public offering of securities, risks may arise with regard to the availability of certain materials on the company's web site as well as the timing of disclosures. Having certain materials available on a web site may cause them to be included as part of informational presentations to prospective underwriters, thus exposing the company to liability for web site contents. The SEC has provided some guidelines regarding this issue, including discussions in its "aircraft carrier" release. While the guidelines are in the formative stage, special attention needs to be paid to assure that improper materials are "scrubbed" from a company's web site before, during and immediately after a public offering of the company's securities.

Where the offering is made abroad, but not in the United States, other issues arise in connection with the extra-territorial effect of a web site. The SEC has provided guidelines for use of web sites to offer securities off-shore.^[6] "Procedures reasonably designed to avoid targeting the United States" include a "prominent disclaimer" indicating that the offer is directed only to persons outside the United States and procedures designed to guard against selling or making services available to U. S. persons. Clear guidelines, however, remain to be articulated in several areas. For example, we have, to date, little guidance as to whether, and if so, to what extent, a U. S. parent company of a foreign subsidiary is responsible for monitoring the contents of the subsidiary's web site. Release No. 34-39799 specifically states that the SEC is "not addressing the circumstances under which a U. S. court could exercise personal jurisdiction over a non-U. S. person with respect to that person's offshore Internet offer." ^[7] U. S. regulators are seeking a balance between effective protection of U. S. investors when information which would constitute an "offering" in the U. S. is made available from a non-U. S. web site which can be accessed by U. S. investors, and recognition of and respect for the difficulties of extra-territorial application of U. S. law. Foreign regulators face comparable challenges. Both U. S. and foreign regulators, however, take the position that when a company uses its web site to further fraud or stock price manipulation, the fact that a company's web site is accessible to visitors from a given country is sufficient to provide a basis for that visitor's country's regulators to take disciplinary action.

A Summary of '34 Act Risks

Most of the risks in violating '34 Act restrictions and requirements spring from the fact that information placed on a web site is instant, global and continuous publication. If information is not yet timely for release, special care must be taken to avoid inadvertent posting. Premature posting may be merely embarrassing, but it may also have more serious consequences, as for example, destroying a "quiet period" in connection with a securities offering, thereby requiring that the offering be delayed. If information is intended for a limited audience, steps to limit access must be taken. Password protection, for example, may be used to assure that only authorized persons attend an on-line road show or shareholders meeting. If information is posted without attention to its removal or identification as historical, it may create an obligation to update and provide a basis for claims that the posting company is providing misleading information.

Chat rooms and newsgroups raise additional challenges. Corporate employees need to be reminded that confidential corporate information may not be disclosed in the course of chat. Broker-dealers which determine they must offer chat room facilities need to remind their brokers that they may not participate in the company's (or another's) chat room (or may do so only under prescribed conditions - a riskier course), and make provision for monitoring to assure compliance with disclosure obligations regarding complaints and minimizing risks of touting and stock price manipulation by others.

The following check list is intended as a starting point, to be expanded as experience indicates additional issues and concerns need to be addressed.

1. Establish guidelines for posting and removing information from a company's web site, or make provision for archiving or otherwise distinguishing historical from current information.
2. Avoid posting only "favorable" information. Selective disclosure may result in providing an inaccurate picture of the company.
3. Implement web site disclosures in a manner which avoids incurring a duty to update information. Utilize disclaimers and establish procedures for timely removal or archiving.
4. Separate promotional and financial information. Avoid linking with analysts reports. Whether or not a list of known analysts is included, include a conspicuous a disclaimer to assure that web site visitors are advised that reports by analysts are independent of the company and that the company takes no responsibility for their accuracy.
5. Review your web site regularly from the point of view of a shareholder derivative (plaintiffs') lawyer.
6. If the web site includes forward looking information, identify it as such, include appropriate disclaimers, refer the web visitor to risk factors, and make sure the referenced risk factors are available at the web site, by linking if reasonably convenient.
7. If offering stock from a web site, assure that all requirements of such offerings are met. If offering services, assure that all requirements relating to such offerings or providing of services, e.g. limited access and permission to deliver required information electronically, are met.
8. If the competitive situation permits, avoid sponsoring a chat room. If the competitive situation requires making a chat room available, make arrangements for monitoring by appropriate persons, train them to monitor skillfully, and establish procedures for monitoring the monitors

The opportunity for assuring instant dissemination of accurate information relatively inexpensively makes it likely that the use of corporate web sites will increase. The challenge for corporate and securities lawyers, and more generally, companies and corporate issuers and underwriters, is to utilize the expanding potential of web sites wisely and well.

FOOTNOTES

1 Copyright 1999, Micalyn S. Harris. All rights reserved. Originally prepared in connection with a course on Basic Securities Law Concepts for the General Practitioner, New York State Bar Association, New York, NY, April 29, 1999. Printed by permission.

2 See SEC Releases 33-7233, 34-36345 of October 13, 1995 and 33-7288, 34-37182 of May 15, 1996 regarding electronic distribution of proxy materials. Electronic voting, governed primarily by state law, is permitted by both New York and Delaware.

3 See e.g., Item 303 of S-K, and instructions for Management’s Discussion and Analysis.

4 See e.g., NASD Rule 3070(c) and NYSE Rule 351(d).

5 See , NASD Conduct Rule 2210, record keeping requirements under Rule 2210(b) and principal review and approval requirements under Rule 2210(c) of the NASDR.

6 See , SEC Rel. No. 33-7516, 34-39799.

7 SEC Rel. No. 34-39799, at p. 2.