Thank you for sharing!

Your article was successfully shared with the contacts you provided.
The following discussion thread excerpt is from an ongoing law.com online seminar “Securities Regulation and the Internet.” Moderator Susan Woodward of OffRoad Capital and a panel of experts discuss how an issuer’s Web site can comply with SEC full and fair disclosure requirements. For information on this program and other law.com seminar offerings, please visit http://www.law.com/seminars. ANONYMOUS Is there any legal requirement that an issuer’s Web site contain a fair mix of information concerning the company — as long as its SEC filings and other public statement meet the requirements of full and fair disclosure? For example, is an issuer risking any securities law liability if it only includes positive press releases on its Web site, but avoids posting more negative-oriented disclosures? — assuming the negative disclosures are otherwise incorporated into its formal SEC filings and/or have otherwise been properly disseminated to the public. The theory would be that the Web site is a public relations tool and you don’t need to include a fully balanced presentation in that context. Presumably most issuers do not post every press release they issue on their Web sites? Is there any favored disclaimer language that helps issuers warn people that the Web site should not be viewed as a disclosure document and that all info posted is qualified by reference to the issuer’s formal disclosure documents, etc.? BLAKE BELL, SIMPSON, THATCHER & BARTLETT, NEW YORK, N.Y. There are requirements that many commentators believe would require a public issuer to refrain from presenting, generally speaking, an unfair picture of the company through selectively collecting, for example, only positive press releases on the Web site. On April 28, 2000, the U.S. Securities and Exchange Commission issued a release, published on May 4, 2000, entitled “Use of Electronic Media”, Release Nos. 34-42728, File No. S7-11-00. The release is available at http://www.sec.gov/rules/ concept/34-42728.htm. Given the guidance provided by the release, there might arguably be several ways in which information on a public issuer’s Web site might be deemed to provide an unfair mix of data that, in essence, might be argued to constitute misrepresentation. Below is a general discussion of parts of the release you might find interesting in response to your question. The release deals with two important issues relating to Web site content. First, it addresses issuer responsibility for hyperlinked information under the anti-fraud provisions of the federal securities laws. Second, it deals with issuers’ communications during registered offerings under the federal securities laws. A. Issuer Responsibility for Hyperlinked Information At the outset, the release emphasizes that although its discussion of issuers’ responsibility for hyperlinked information is framed in terms of Section 10(b) of the Exchange Act and Rule 10b-5, it applies equally to questions arising under Section 17(a). The release notes that courts and commentators have developed two theories for when an issuer should be held liable for statements by third parties. The “entanglement” theory generally applies when the issuer involves itself in the preparation of the information. The “adoption” theory applies when an issuer explicitly or implicitly endorses or approves the information. Regarding entanglement, the release states that “[i]n the case of hyperlinked information, liability under the ‘entanglement’ theory would depend upon an issuer’s level of pre-publication involvement in the preparation of the information.” Inexplicably and regrettably, however, the release fails to specify any factors that might be considered in deciding whether an issuer has had sufficient pre-publication involvement in the preparation of the information to warrant liability under the entanglement theory. Rather, the release simply states that “[w]e do not discuss the application of the ‘entanglement’ theory to hyperlinked information on third-party Web sites. We recognize that ‘entanglement’ and ‘adoption’ theories often overlap and that some of the factors relating to an adoption analysis also may apply to an entanglement analysis.” The good news on the entanglement front is that the mere act of placing hyperlinks to analysts’ reports in which the issuer had no pre-publication involvement in their preparation would seem, under the release, to be an insufficient basis for a finding of entanglement. Adoption of those reports, however, is a different matter. The release addresses a series of factors that the Commission believes are relevant in deciding whether an issuer has adopted information on a third-party Web site to which it has placed a link. The release cautions, however, that the factors are “neither exclusive nor exhaustive.” The three factors are the context of the hyperlink, the risk of confusion, and the presentation of the hyperlinked information. 1. The Context of the Hyperlink According to the release, what the issuer says about a hyperlink and the context in which the issuer places a hyperlink are important factors in determining whether the issuer intended to adopt the information to which the hyperlink points. The release provides some guidance regarding specific examples: Example 1: When an issuer embeds a hyperlink within a document, “the issuer should always be deemed to be adopting the hyperlinked information.” Example 2: If the issuer explicitly describes the information to which the hyperlink points as accurate or good, a finding of adoption may be appropriate. Thus, according to the release, “a statement such as ‘XYZ’s Web site contains the best description of our business that is currently available” is likely an adoption. Example 3: If the context of the hyperlink suggests “that the hyperlinked information supports a particular assertion on an issuer’s Web site”, a finding of adoption might be warranted. For example, a statement that “[a]s reported in Today’s Widget, our company is the leading producer of widgets worldwide” might be problematic. Although the SEC fails to provide any guidance on the matter, it states that “even when an issuer remains silent about the hyperlink, the context nevertheless may imply that the hyperlinked information is attributable to the issuer.” Finally, when an issuer is in registration, the release provides that if the issuer establishes a hyperlink that is not embedded within a disclosure document from its Web site “to information that meets the definition of an ‘offer to sell,’ ‘offer for sale’ or ‘offer’ under Section 2(a)(3) of the Securities Act, a strong inference arises that the issuer has adopted that information for purposes of Section 10(b) of the Exchange Act and Rule 10b-5.” 2. The Risk of Confusion a. Use of Intermediate Screens and Disclaimers Another factor that must be considered in deciding whether an issuer has adopted information to which it hyperlinks is “the presence or absence of precautions against investor confusion about the source of the information.” In this regard, the release seems to bless the widespread practice of making the information available “only after a visitor to its Web site has been presented with an intermediate screen that clearly and prominently indicates that the visitor is leaving the issuer’s Web site and that the information subsequently viewed is not the issuer’s.” Moreover, according to the release, there is even less risk of confusion if the viewer’s access to the third party’s information is “preceded or accompanied by a clear and prominent statement from the issuer disclaiming responsibility for, or endorsement of, the information.” Although the release encourages the use of intermediate screens and disclaimers in appropriate circumstances, it also emphasizes that statements and disclaimers will not “insulate an issuer from liability for hyperlinked information when the relevant facts and circumstances otherwise indicate that the issuer has adopted the information.” As if such a statement were not clear enough, the release also emphasizes that “[w]e do not view a disclaimer alone as sufficient to insulate an issuer from responsibility for information that it makes available to investors whether through a hyperlink or otherwise. To conclude otherwise would permit unscrupulous issuers to make false or misleading statements available to investors without fear of liability as long as the information is accompanied by a disclaimer.” Additionally, the release emphasizes that specific disclaimers of anti-fraud liability are “contrary to the policies underpinning the federal securities laws.” b. Framing and Inlining The release discourages the practices of “framing” or “inlining” content from other Web sites. Framing involves a hyperlink that creates a framed window on the party’s Web site within which content from another site appears. In effect, it opens up a small window which a viewer may mistakenly conclude is part of the party’s Web site unless steps are taken to make very clear that the information within that “framed area” is from a third-party Web site. Inlining does essentially the same thing, but does it without a visible border around the framed area, increasing the risk of confusion unless steps are taken to make clear that the inlined area contains information from a third-party Web site. 3. The Presentation of the Hyperlinked Information The release emphasizes that the presentation of the hyperlinked information by an issuer is relevant to an adoption inquiry. In this regard, according to the Commission, at least three issues are relevant: (i) whether the issuer is “selectively providing hyperlinks”; (ii) whether an issuer is creating and removing hyperlinks based on the nature of what is said about the issuer on those sites; and (iii) whether the issuer uses the layout or appearance of the screen to highlight a particular hyperlink. a. Selectively Providing Hyperlinks The release provides that efforts by an issuer to provide selected hyperlinks to a subset of available information so as to “direct an investor’s attention to particular information” is “relevant in determining whether the issuer has adopted the information.” This guidance is relevant to, among other things, the recurring issue of whether a company should include links to analysts’ reports on its Web site. According to the release, “[w]here a wealth of information as to a particular matter is available, and where the information accessed by the hyperlink is not representative of the available information, an issuer’s creation and maintenance of the hyperlink could be an endorsement of the selected information.” b. Selective Establishment and Termination of Links In what should come as a surprise to no one, the release makes clear that an issuer should not selectively create hyperlinks and then terminate those hyperlinks based on the nature of what is said about the issuer on the hyperlinked site. According to the Commission, such a practice “may be viewed as attempting to control the flow of information to investors” and “suggests that the issuer has adopted the information during the periods that the hyperlink is operative.” c. Layout of Screen to Highlight a Hyperlink The release further makes clear that manipulating the layout of the screen so as to differentiate a particular hyperlink through “prominence, size or location” or “color, type font or size” or in some other fashion intended to draw a viewer’s attention to the hyperlink “may suggest that the issuer favors the hyperlinked information over other information available to the investor on or through the site.” According to the release, special weight will be given where the method of presentation “influences disproportionately an investor’s decision to view third-party information” in determining whether the issuer has adopted the hyperlinked data. This data is adapted from an article I wrote in an effort to analyze the release. See Blake A. Bell, A Summary and Analysis of the SEC’s April 28, 2000 Interpretive Release Entitled “Use of Electronic Media” http://www.cybersecuritieslaw.com/ articles/bell_internet_release. PROFESSOR GORDON SMITH, LEWIS & CLARK LAW SCHOOL, PORTLAND, ORE. Blake Bell presents a thorough summary of the SEC’s release on this issue, but that release contains a statement that made me pause: “Issuers are responsible for the accuracy of their statements that reasonably can be expected to reach investors or the securities markets — regardless of the medium through which the statements are made, including the Internet.” Prior to the Internet, we were quite diligent about segregating “disclosure” from “marketing information.” We all know that a prospectus is a marketing document, of sorts, but prospectuses have never contained the unabashed cheerleading that is common on many Web sites. In many instances, we will be able to shrug this off as mere “puffing,” but I suspect that we will encounter more serious cases as electronic distribution becomes the norm. A simple example: The SEC used to object to companies linking their products to more recognizable brands of customers or strategic partners, e.g., by featuring the trademark of the more recognizable brand in pictures on the inside covers of a prospectus. This was viewed as misleading, yet it is common practice to see such connections featured on Web sites. Perhaps one could argue that such presentations are less misleading when they are separated from the “prospectus,” but I am not sure that is convincing. PROFESSOR JILL FISCH, FORDHAM UNIVERSITY SCHOOL OF LAW, NEW YORK, N.Y. In fact, prior to the Internet there were a number of lawsuits that linked (with varying degrees of success) marketing information with disclosure to the securities markets, and which argued that, under appropriate circumstances, marketing information could reasonably be expected to reach the securities markets. See, e.g., Hemming v. Alfin Fragrances, Inc., 690 F.Supp. 239 (S.D.N.Y. 1988); In re Carter-Wallace Inc. Sec. Litig., 220 F.3d 36 (2d Cir. 2000).

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.