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Last spring the Securities and Exchange Commission promulgated an interpretive release addressing the use of electronic media by issuers of securities. The release is intended to reduce the level of uncertainty regarding permissible web site content while encouraging the electronic dissemination of information to securities investors. Securities and Exchange Commission, Release No. 33-7856 (Apr. 28, 2000), available in Securities and Exchange Commission, “SEC Interpretation: Use of Electronic Media,” � I http://www.sec.gov/rules/concept/ 34-42728.htm(Release). Specifically, the release addresses the degree to which an issuer may be held responsible for hyperlinking its web site to third-party sites that contain materially misleading information regarding the security of the issuer. Id. � II(B)(1). In addition, the release outlines the scope of permissible hyperlinking to third-party web sites from the web site of an issuer in the process of securities registration. Id.� II(B)(2). The release first addresses issuer liability for hyperlinked third-party content that is materially misleading. Prior to promulgation of the release, there was substantial concern in the securities community regarding the extent of such liability. This concern arose from speculation of how much precedential value a 1997 settlement between the SEC and Presstek Inc. would have in the online setting. Id.� II(B)(1). In Presstek, the issuer had distributed third-party analysts’ reports, knowing that the reports contained materially misleading information about the issuer’s stock. In the Matter of Presstek Inc., Exchange Act Release No. 34-39472 (Dec. 22, 1997), available in Securities and Exchange Commission, In the Matter of Presstek Inc.� III(B)(1) http://www.sec.gov/enforce/adminact/ 3439472.htm. In reaching its settlement with Presstek, the SEC stated that when an issuer distributes third-party information concerning the issuer’s own securities, the issuer might have either expressly or implicitly “adopted” that information, thereby allowing attribution of the information to the issuer. Id. � III(C)(3)(b). The SEC further stated in Presstekthat “an issuer that disseminates false third party reports . . . may be fully liable for the misstatements contained in them, even if [it] had no role whatsoever in the preparation of the report.” Id. ( citing In re Cypress Semiconductors, 891 F. Supp 1369, 1377 (N.D. Cal. 1995), aff’d sub nom. Eisenstadt v. Allen, 113 F.3d 1240 (9th Cir. 1997)). Taking Pressteka step further, the release unambiguously indicates that issuers who hyperlink to third party web sites may be adopting the third-party information as their own for the purposes of federal antifraud securities law. Release � II(B)(1). In ascertaining whether such materially misleading information should be attributable to an issuer, the release states that content liability is directly related to whether the issuer’s hyperlink rises to the level of an express or implied endorsement or approval of the third party’s information. As a separate but related matter, the release also makes clear that information published on the Internet by third parties might be attributable to the issuer if the issuer had any “pre-publication involvement in the preparation of the information.” Id. � II(B)(1) ( citing Elkind v. Liggett & Myers Inc., 635 F.2d 156 (2d Cir. 1980)). This alternative ground for attributing information to an issuer is known as the “entanglement theory.” Id. � II(B)(1). The release articulates three factors that should be considered in ascertaining whether a hyperlink from an issuer’s web site will have the effect of attributing the third-party content to the issuer. Id. � II(B)(1). While these three factors are not exhaustive of all relevant considerations, the release does state that the three factors “form a useful basis for analysis.” Id. � II(B)(1). To minimize the potential for securities fraud liability, it would be prudent for an issuer to take the following three considerations into account when developing its web site. The release states that the first factor to consider is the “context of the hyperlink.” Id. � II(B)(1)(a). While this consideration appears to be facially vague, the release articulates a few hypothetical examples to be used as a guide. For example, express endorsements by the issuer, located near the hyperlink, would likely weigh in favor of a finding of adoption. So too would an issuer statement that merely references what the third party says about the security. Furthermore, it is possible for a hyperlink to form the basis of an adoption theory of liability, even if the issuer remains silent as to the hyperlink. The full context of the hyperlink is a relevant consideration, regardless of whether or not the issuer accompanies the link with express language. The first factor provides clear-cut guidance on two particular issues. First, the release states that an issuer will always be deemed to have adopted third-party content if the issuer embeds the hyperlink in a document that is required to be delivered or filed by the federal securities laws. Id. � II(B)(1)(a). This concrete mandate is a corollary to the legal doctrine known as the “envelope theory.” The envelope theory generally provides that when a document is required to be filed or delivered by the federal securities law, then any web pages that are hyperlinked to the document will, by analogy, be treated as if they were sent together in a single conventional mailing. Id. �� II(A)(4), II(B)(1)(a) n.57. The second issue relates to registration issuers. Id. � II(B)(1)(a). If an issuer hyperlinks its site to any information constituting an “offer to sell” within the meaning of the Securities Act, it is highly likely that the information will be attributable to the issuer for the purposes of 10b-5 liability. The second factor relevant to the theory of adoption is the “risk of [investor] confusion.” Id. � II(B)(1)(b). Consequently, issuers would be prudent in taking precautions designed to prevent investors from being confused as to the source of hyperlinked content. The release suggests the implementation of three specific precautions. It first suggests that an issuer place an “intermediate screen” between hyperlinked web pages. This screen should “clearly and prominently” indicate that the user is about to leave the issuer’s web site and that the new site does not contain information attributable to the issuer. In addition, issuers should accompany hyperlinks and intermediate screens with appropriate language disclaiming endorsement or responsibility for third-party information. While the release makes it clear that the presence of a disclaimer will not necessarily insulate the issuer from liability, disclaimer language must be “clearly and prominently” displayed if it is to be effective at all. The final consideration in ascertaining the risk of investor confusion concerns “framed” content. The release suggests that the use of framed or inlined information should be minimized if the issuer does not want to be attributed as the source of the information. Depending on the context, issuer framing of third-party content can form the basis for a strong inference that the issuer is either a source or endorser of the framed information. The final factor for consideration is the “presentation of the hyperlinked information.” Id. � II(B)(1)(c). The release expresses a concern by the SEC over the issuer’s overall site layout. For example, an issuer might use a particular audiovisual display that draws attention to certain pieces of information while de-emphasizing others. Such a layout may be treated as an adoption of such information contained within the hyperlinked pages. The release observes that the size, location and prominence of information are all relevant in ascertaining the presence or absence of adoption. An inference of adoption is not unlikely if a particular hyperlink is distinguished from other hyperlinks in its size, color or type font. In fact, the release states that when the chosen method for presenting a hyperlink disproportionately influences an investor to view certain third-party information, it is more likely that the issuer may be attributed as adopting the information as its own. It is also important to consider whether the site layout “direct[s] an investor’s attention to particular information by selectively providing hyperlinks[.]” Id. � II(B)(1)(c) (emphasis added). To avoid an inference that the issuer is endorsing particular information, highlighted hyperlinks should accurately represent a cross-section of the information available on the issuer’s security. Furthermore, issuers should avoid hyperlinking to miscellaneous pages on third-party web sites and strongly consider linking to home pages instead. By linking to miscellaneous pages rather than home pages, the inference may be drawn that the issuer is adopting the information of the miscellaneous page, rather than that the issuer is merely providing a convenient link to the third-party site. To this end, the release expressly states that selective linking “suggests that the issuer has adopted the [third-party] information during the periods that the hyperlink is operative.” Id. � II(B)(1)(c). While the concerns discussed thus far pertain to issuer liability for materially misleading third-party information, the release also addresses the appropriateness of hyperlinks during issuer registration. Id. � II(B)(2). Although an issuer may wish to maintain an Internet presence throughout its registration process, the Securities Act prohibits an offer to sell securities during the process. Securities Act of 1933, 15 U.S.C. � 77e(c) (2000). Consequently, issuer web sites must conform to certain requirements to avoid running afoul of the prohibition on “offers to sell.” As a result of this potential “adoption theory” liability, proper compliance demands attention to the content of both the issuer’s web site and the web site of any hyperlinked third parties. An issuer that is in the registration process may still maintain public communications via the Internet; however, web site and hyperlinked content must be limited to “ordinary-course business and financial information.” Release, � II(B)(2). The release expressly states that permissible information may include: (1) advertisements of the issuer’s services and products; (2) reports required to be filed under the Securities and Exchange Act of 1934; (3) dividend notices, proxy statements and annual reports; (4) press releases relating to business and financial developments; (4) security holders’ meetings, and answers to appropriate security holder questions; and (5) responses to unsolicited inquiries from financial analysts and others having a legitimate interest in the business affairs of the issuer. Id. � II(B)(2). This information may properly appear on either the issuer’s own web site or on a hyperlinked web page. While this provision of the release primarily focuses on reporting issuers that are in registration, it also applies to nonreporting issuers that might seek to register their securities at some time in the future. Id. � II(B)(2). While nonreporting issuers may post online information relating to the ordinary course of their businesses, such issuers should adhere to the guidelines that apply to reporting issuers in the registration process. This is because nonreporting issuers are not permitted to “condition the market” prior to making a public offering. The release states that a high degree of scrutiny will apply to nonreporting issuers that have not maintained an Internet presence in the past, but who create new web sites contemporaneous to their preparation for public offerings. Such a circumstance is viewed as suspect, because an issuer might be simply trying to impermissibly condition the market for an imminent public offering. This prohibition is in furtherance of the SEC’s belief that investors may confuse issuer attempts to promote its product from attempts to sell its prospective securities. Issuers that wish to maintain an Internet web site should take care to avoid securities liability for third-party content. In doing so, hyperlinks should be used so that their presentation and context do not imply that the issuer endorses the third-party information. Hyperlinks should also be used in an articulate manner designed to minimize any risk of investor confusion as to the source of the third-party information. In addition, nonreporting issuers that might go public should observe the appropriate guidelines to assure that they do not impermissibly condition the market for their offer of sale. By following these guidelines, issuers will minimize their risk of noncompliance and increase the likelihood of avoiding adoption theory liability. J. Christopher Giancarlo is the executive vice president of business development at FENICS Ltd.in New York. Steven E. Halpern assisted in the preparation of this article.

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