Uses and Abuses of the Internet in the Securities Industry

• Jurisdiction: United States,Federal
• Citation: Vol. 31 No. 10 Pg. 95
• Pages: 95
• Publication year: 2002

31 Colo.Law. 95 Colorado Lawyer 2002.

2002, October, Pg. 95. Uses and Abuses of the Internet in the Securities Industry

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95

Vol. 31, No. 10, Pg. 95

The Colorado Lawyer
October 2002
Vol. 31, No. 10 [Page 95]

Specialty Law Columns
Business Law Newsletter
Uses and Abuses of the Internet in the Securities Industry
by David C. Roos

This newsletter is sponsored by the CBA Business Law Section to apprise members of current information concerning substantive law. Subject to author submissions, the newsletter is published eleven times per year, focusing on business law topics for the Colorado practitioner, including but not limited to, issues surrounding anti-trust bankruptcy, business entities, commercial law, corporate counsel, financial institutions, franchising, nonprofit entities, securities law, and small business entities

Column Editors:

David P. Steigerwald of Sparks Willson Borges Brandt & Johnson, P.C., Colorado Springs - (719) 475-0097; Column Ed. for Bankruptcy Law: Curt Todd of Lottner, Rubin, Fishman, Brown & Saul, P.C., Denver - (303) 292-1200

About TheAuthor:

This month's article was written by David C. Roos, Denver, Counsel with Moye, Giles, O'Keefe, Vermeire & Gorrell LLP - (303) 292-2900, david.roos@ moyelaw.com.

The Internet has improved the efficiency of capital markets. However, it also has been used, knowingly or inadvertently, to violate the securities laws. This article summarizes some of the permitted and prohibited uses of the Internet within the securities industry.

A fundamental concept under the federal securities laws is disclosure. In particular, the securities laws regulate the content, timing, and dissemination of information by market participants. The Internet, by making immediate worldwide disclosure of information possible, has the potential to accelerate the flow of information throughout the securities markets and dramatically increase their efficiency. However, the Internet is equally capable of undermining the disclosure scheme established by the securities laws, thus exposing public companies and other market participants to liability for violating those laws.

As might be expected, the Internet's impact on the securities industry has been a mixed bag. Use of the Internet has been adopted (or at least permitted) by the Securities and Exchange Commission ("SEC") in certain carefully defined areas. However, in the SEC's view, the Internet has been abused by numerous market participants, thereby causing the SEC to establish the Internet as a leading priority within its Enforcement Division. This article discusses a variety of permitted and prohibited uses of the Internet, as well as the SEC's enforcement and rulemaking initiatives in this area.

Public Offerings

In general, an issuer may sell its securities either in a public offering or a private offering. A public offering requires that a registration statement be filed with and declared effective by the SEC pursuant to the Securities Act of 1933, as amended ("1933 Act").1 Registration under the 1933 Act is intended to ensure that appropriate information concerning the issuer, in the form of a prospectus, is delivered to all potential investors on a timely basis.2

Assuming compliance with state "Blue Sky" laws, the public offering generally may be made to an unlimited number of potential investors residing anywhere in the United States. However, while the issuer is in registration,3 the 1933 Act places certain restrictions on the issuer's ability to communicate with potential investors and with the public through any method other than the delivery of a preliminary or definitive prospectus.

The Internet's most visible contribution to the public offering process has been to facilitate the electronic delivery of prospectuses. In an interpretive release issued in 1995,4 the SEC approved the electronic delivery of prospectuses (as well as proxy statements and annual reports to shareholders). In its interpretive release dated May 2, 2000 ("2000 Release"), the SEC provided further guidance on the electronic delivery of prospectuses and on a wide range of other Internet-related issues.5 For these purposes, "electronic delivery" includes disclosure through various media, including Internet websites, electronic mail, bulletin boards, CD-ROM, and computer networks.

The 2000 Release discusses three requirements that must be satisfied for the electronic delivery of documents to be effective:

1. Notice. The recipient must receive timely notice that the document has been made available; simply posting information at a website without notice that the document is available will be inadequate.

2. Access. The recipient must be able to access and retain the document (such as by printing or downloading) in a manner that is not burdensome.

3. Evidence of Delivery. The issuer must have reason to believe that the means of electronic transmission used for a particular investor will result in actual delivery of the prospectus. This requirement generally has been addressed by obtaining the investor's consent to delivery of the prospectus through a particular electronic media. The 2000 Release provides that consents may be obtained in writing, electronically, or telephonically, provided that a record of the consent is retained.6

Following his appointment as Chairman of the SEC in August 2001, Harvey Pitt indicated that the SEC would review quickly its existing interpretive releases on electronic communications. One of the first Internet-related decisions under Chairman Pitt was to declare effective the first all-electronic offering, a registration statement filed by American Life Insurance Inc. covering a variable annuity, which the SEC declared effective in October 2001.

Notwithstanding the new ground broken by American Life, the public offering process...