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To say that the Internet has changed the face of securities law would be a monumental understatement. The Internet has helped to reshape the securities market as we know it. One of the most significant changes that the Internet has ushered in is the ability to communicate with a mass audience. The Internet has provided public companies with the opportunity to reach millions of people almost instantaneously and with only a fraction of the cost traditionally associated with communicating with current and potential investors. It has become commonplace for a publicly traded company to have its own Web site. These sites have become a depository for basic corporate and investor information. According to studies conducted by the Investor Relations Institute, more than 80 percent of companies surveyed have a Web site and use their Web site to convey investor information. [FOOTNOTE 1]Increasingly, company Web sites have become a resource on which a company lists its financial and marketing data, tries to anticipate and answer basic investor questions, comments on future projects and even links to other sites discussing the merits of the company. The emergence of this tremendously powerful tool comes with a heightened concern for corporate disclosure. The pervasiveness of the Internet has prompted the SEC to state and reiterate its position on electronic information on numerous occasions. Most recently, the SEC has commented that securities laws are just as applicable to information contained on a company’s Web site as they would be to any other statement issued or attributable to that company. [FOOTNOTE 2]The commission has made it clear that a company would be liable for the accuracy of any statement contained on its Web site. [FOOTNOTE 3] Thus, one of the biggest pitfalls that a company must look out for is the dissemination of information that can be construed as false or misleading, thereby implicating Rule 10(b)-5 liability. Because of the ease by which information on the Internet can be accessed and disseminated, as well as the recent attention that the SEC has given to electronically conveyed information, it is increasingly important that special attention be paid to a company’s Web site and all information contained therein, so as to avoid the threat of litigation. THE DUTY TO UPGRADE The SEC has determined that all postings on a company’s Web site are the equivalent of a press release or an SEC filing with respect to liability. For this reason, all information contained on a company’s Web site must be current. This means that information that was truthful when released must be updated if time causes it to be no longer truthful and/or misleading. [FOOTNOTE 4]If such information is not updated, it may expose the company to a potential lawsuit. [FOOTNOTE 5] This duty carries with it certain obligations that any prudent company must perform to minimize exposure. To begin, a company should always date any posting made on its Web site. This dating should denote the point at which the information was posted on the company’s Web site. The second thing that a company must do is to regularly audit its site for content that is either outdated of misleading. This audit should include a comprehensive review of all information contained on the site, to eliminate any potential sources of liability. Finally, if it is desirable for a company to keep “old” information on its Web site, that information should be contained in a section clearly marked as archived information. This information should also be accompanied by the other aforementioned safeguards as well. By taking these precautions, it is likely that a company can avoid an investor suit. FORWARD-LOOKING STATEMENTS Besides wishing to publish current information, a company may wish to publish information regarding future endeavors. Such forward-looking statements can generally be made without incurring the wrath of investor lawsuits, because the Private Securities Litigation Reform Act of 1995 provides a safe harbor provision protecting properly made forward-looking statements from investor suit. [FOOTNOTE 6]When used correctly, this safe harbor provision may be a very effective tool in not only publicizing forward-looking information to current and prospective investors, but in avoiding liability. The problem is that many companies do not take full advantage of this safeguard. Often, statements made on company Web sites contain insufficient safe harbor language. That is, either the safe harbor language is not likely to be effective against litigation or is completely omitted. To use this safeguard, a statement must be explicitly identified as forward-looking. Simply making a broad, boilerplate statement declaring that all statements on a certain page or in a certain area of a company’s Web site are “forward-looking” will likely be insufficient in bringing the statements into the protections of the safe harbor provision of the Private Securities Reform Act. [FOOTNOTE 7] Each and every statement that is forward-looking should be identified as such. It may be helpful to take note of what words or phrases commonly accompany forward-looking statements. The following, although not an exhaustive list, is an example of proper safe harbor language: “believes, anticipates, plans, may, hopes, can will, expects, is designed to, with the intent, and potential.” [FOOTNOTE 8]However, simply because a statement does not contain any of the aforementioned language does not mean that it will not be construed as a forward-looking statement. In addition to proper wording, all forward-looking statements must be accompanied by cautionary language identifying all factors that may cause results inconsistent with the statement’s predictions. This cautionary language must not only accompany the forward-looking statement but it must be specific to that statement. That is to say, that generic, blanket warnings are likely to be insufficient. The cautionary language must be specifically tailored to the statement that it accompanies. [FOOTNOTE 9] In addition to the safe harbor provisions of the Private Securities Reform Act, a company may find refuge from liability in the “bespeaks caution” doctrine. This doctrine provides that economic statements can be free from liability if accompanied by adequate cautionary language. Economic statements can include projections, estimates of future performance or any other optimistic forward-looking economic statements. Much like the safe harbor provisions of the Private Securities Reform Act, these statements must also appear to be forward-looking. In addition, these statements must be accompanied by precise cautionary language that fully discloses all material risks that might alter the statement’s projected outcome. This protection also extends to statements based on erroneous assumptions, so long as the cautionary language adequately addresses such assumptions. Furthermore, there is even a question as to whether the cautionary language must be in the same document as the forward-looking language. In fact, there is currently a circuit split on this very issue. [FOOTNOTE 10] The bottom line in the implication of safe harbor protection of the Private Securities Reform Act or the “bespeaks caution” doctrine is that a company must be thorough. To protect itself from liability, a company must not only phrase any forward-looking statements correctly, but it must provide specific cautionary warnings in case its predictions fail to come to fruition. HYPERLINKING It is not uncommon for a company to link other Web sites to its own via a hyperlink. Hyperlinks allow a company to expand its own site by taking the viewer to a network of other sources about the company. This practice is inherently dangerous. By hyperlinking to information contained on a site other than that which is controlled by the company, it may effectively be adopting the statements of a third party as its own. This means that the company may be assuming liability for any misrepresentations made by the third party. In its May 2000 release, the SEC outlined several factors that create a presumption that the hyperlinked material has been “adopted” by the company, thereby creating the potential for liability. The first of these factors is the context of the hyperlink. Any statement explaining or endorsing the hyperlinked material may be deemed an adoption of the third party’s statements. The second factor outlined by the SEC’s release is any showing of favoritism to the hyperlinked material. The commission explained that if a company in any way appears to favor one hyperlink over another, this favoritism may be seen as an adoption of the favored information. Finally, the commission stated that it will look to the potential for investor confusion as to the source of the information as a factor in determining whether a company has adopted the statements of a third party as its own through a hyperlink. The SEC explained that the presence or absence of disclaimers or any material seeking to reduce investor confusion as to the source of the hyperlinked information is another factor in whether a company has adopted the hyperlinked statements as its own. [FOOTNOTE 11] Additionally, in its 2000 release, the SEC declared that a company may be responsible for hyperlinked material under the theory of entanglement. Under this theory, the commission stated that it would look to the contacts between the issuer of the hyperlinked statement and the company. If the commission believed the contacts to be significant enough that impartiality had been lost, then there would be the potential for liability. [FOOTNOTE 12] There are several ways for a company to avoid liability for hyperlinked information on its Web sites. If the hyperlink was created in order to give the viewer analyst reports, one way to avoid liability is to provide a link to all reports made by analysts regarding that company. The pitfall to this approach is that it may be impossible to give the same access to all analyst reports (some may not be accessible via the Internet or may be subscriber-only sites), which might give the impression that the company endorses one report over another. A second way of avoiding liability might be to provide only a list of the sites where company information may be found. Thus, rather than a hyperlink, this method would simply entail the listing of the URL of the other site, theoretically reducing the chances that an investor would mistakenly believe that the information was promulgated by the company. [FOOTNOTE 13]A third method of protection is the use of a disclaimer. The SEC has commented that “clear and prominent” disclaimers would be helpful in reducing investor confusion. [FOOTNOTE 14] As the proliferation of company Web sites increases, so too does the need for increased attention to issues of corporate disclosure. The Internet provides companies a platform from which to reach a worldwide audience. With this increased ability to communicate with both current and potential shareholders comes an increase in the potential for shareholder suits. The more widely viewed and elaborate a company’s Web site becomes, the more potential there is for a claim of material misrepresentation. Because of this potential for increased liability on the part of companies operating their own Web sites, it is important that companies be attentive to all information contained on their Web sites. Michael D. Maline is an associate at Brown, Raysman, Millstein, Felder & Steiner, LLPin New York. ::::FOOTNOTES:::: FN1 SeeJeffrey E. Lewis and Ajay K. Mehrotra, “Investor Relations in the New Economy: The Risks and Rewards of Using the Web Sites for Corporate Communications,” E-Commerce Law Report, August 2000, 2 No. 10 GLECOMLR 15, at 1 ( citingNational Investor Relations Institute, 1998 Research Measures Change Against 1995 Benchmark Data, PR Newswire, June 8, 1998, available in Lexis, News Library, Allnews File; Prentice, Robert A. Vernon, J. Richardson & Susan Scholz Corporate Web Site Disclosure and Rule 10(b)-5: An Empirical Evaluation, 36 AM. BUS. L. J. 531, 538 (Summer 1999)). FN2 SeeSara Beth Brody, “Public Issuers: Web Site Disclosure Issues,” 6 No. 17 ANDERLR 11 1, 1 (Oct. 23, 2000) ( citingUse of Electronic Media, Release Nos. 33-7856, 34-42728 (May 4, 2000)). FN3 See id. FN4 See generally, Note, “The Status of the Duty to Upgrade,” 7 Cornell J.L. & Pub. Policy 605 (1998). FN5 See id. FN6The Private Securities Litigation Reform Act of 1995 is applicable to Web site postings because they are treated as any other press release or SEC filing for purposes of securities law. FN7 SeeLisa Klein Wager, “Safe Harbors in Cyberspace,” Law Journal Extra, ( citingSEC Release, July 29, 1998 at 13, 16, n. 20). FN8 See id. FN9 See id. FN10 SeeSara Beth Brody, “Public Issuers: Web Site Disclosure Issues,” 6 No. 17 ANDERLR 11 1, 1 (Oct. 23, 2000). FN11 SeeSEC Release, “Use of Electronic Media,” Release Nos. 33-7856, 34-42728 (May 4, 2000). FN12 See id. FN13 SeeSara Beth Brody, “Public Issuers: Web Site Disclosure Issues,” 6 No. 17 ANDERLR 11 1, 1 (Oct. 23, 2000). FN14 See id.( citingSEC Release, “Use of Electronic Media,” Release Nos. 33-7856, 34-42728 (May 4, 2000)).

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