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The Securities and Exchange Commission issued new guidelines this month for those who issue securities via the Web, hoping to clear up confusion among investment brokers and attorneys on a basic dilemma: What are the rules for offering securities on the Web, and how do issuers keep investors properly informed? The SEC guidelines were published as an Interpretive Rule effective May 4, although the commission will be taking comments on the changes until June 19. In its rule, the SEC also asked dozens of questions it hopes will be taken up by the bar and the financial world. Most of the long-awaited notice codifies what has been the SEC’s approach since its major pronouncements in 1995 and 1996 on how investors could give informed consent through an electronic medium, said Guy P. Lander, a partner at Goodman Phillips & Vineberg in Manhattan. “It’s important because it elucidates and discusses a lot of issues” that the securities bar has been following, said Lander, chairman of the New York State Bar Association’s securities regulation committee. GLOBAL CONSENT One issue of concern was whether investors can give global consent, in other words, agree to electronic delivery of all documents from any issuer purchased through an intermediary. The SEC said global consent was allowable, as long as investors understood that they may revoke their consent at any time. The rule said intermediaries may opt for an all-or-none consent approach to documents to ensure delivery obligations, as long as that policy is adequately disclosed. In 1995, the question was who had Internet access to be able to accept electronic delivery, said Rubi Finkelstein, in the New York office of Orrick Herrington & Sutcliffe. The SEC said issuers must still use traditional paper mailings, even though some investors, according to Finkelstein, can now choose to have all communications with every company they have invested with be sent via the Web or e-mail. The SEC also clarified its “envelope theory,” which considered documents delivered if they arrived in the same envelope, and in which confirmation is easily obtained through the postal service or private delivery services. But on a Web site for investors, questions arose over the nature of whether hypertext links, or computer code that links Web pages to one another, made those documents appear to be together in the same “envelope.” “People got confused as to what was appropriate Web site content when an issue is in registration,” said Lander. “If somebody put out a prospectus on a Web site, the envelope theory would result in everything in the Web site being considered part of the prospectus.” Now, said Lander, that theory would seem to apply only if an issuer deliberately makes linked information part of a prospectus. The ruling codifies what the SEC counsel had been telling securities lawyers individually, said Finkelstein, a corporate lawyer and co-chair of Orrick’s company practice group. Even though the commission did not draw a bright line in many instances relating to Web site content, the notice does provide much of the SEC’s thinking in written form, Finkelstein said. “They gave a little more meat on the bone,” she said. The SEC appears to acknowledge that many businesses seeking capital are based solely on the Internet, and separating advertising from company day-to-day business becomes muddier. The key is keeping prospectus information and other information separated, said Lander. “As long as it’s segregated I didn’t think the medium should make much difference,” said Lander. THIRD-PARTY SCREENERS Another significant portion of the rule was the interpretation of the role of Web sites that serve as third-party screeners between securities issuers and potential investors. Some of those third-party service providers are neither registered broker-dealers nor affiliated with them, but nevertheless they screen investors for online initial public offerings on an access-restricted basis. The SEC appeared concerned that third-party screening, particularly Web sites that allow investors simply to check a box that certifies them as “accredited” or “sophisticated,” may involve general solicitation, which would disqualify the offering as “private.” “I take this as a shot across the bow,” said Finkelstein. The SEC is aware of screening sites, she said, and was “warning people to clean up their act.” Overall, the changes to the Internet guidelines might make more information available to investors over the Web, as issuers, broker-dealers and others are now more mindful of the SEC’s thinking, said Lander. HIGHLIGHTS OF THE SEC’S INTERPRETIVE RULE ON WEB USE � Global consent from investors to electronic delivery of documents is acceptable, as long as the consent is informed and revocable by the investor. � Securities issuers may deliver documents in portable document format, or PDF, viewable by free software in widespread use on the Internet. � Securities issuers including a hypertext link within a document filed with the SEC or delivered to an investor should consider that linked information as part of the document itself. � The SEC will assess liability for linked information based on three main factors: the link’s context, the risk of confusion to an investor and the way the link is presented, including the use of framed, or framed pages. � Third-party Web sites that screen potential investors for IPOs may be in violation of the prohibition on general solicitation. � The SEC is asking for comments on Internet chat rooms, bulletin boards and discussion forums, as well as suggestions for mutual fund Web sites, which continuously sell shares and are effectively in registration all the time.

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