The convergence of securities law and the Internet.

• Author: Martin, Stephen G.

One can't help but notice the extent to which the Internet has begun to affect our lives, business, and the law. Everything from sports and news, to business and commerce can be found on-line. These technological advancements have also begun to affect the financial and securities industry. For example, in recent years, securities news groups have flourished. These news groups consist of people who communicate on various subjects through electronic mail. While the information transmitted varies in credibility, the groups continue to grow at a rapid pace.

In addition, many financial and securities-related on-line sites have emerged. These sites are locations on the Internet where individuals and businesses can place information for others to view. You can find everything from information on companies and recent Wall Street figures, to various levels of investment advice. Many of these locations are put on-line by individuals. However, a number of reputable securities firms have begun to offer research and trading as well.

With these new opportunities to distribute information, it didn't take long for small companies to realize that the Internet may provide a tool in obtaining financing. Small companies, unable to attract a traditional underwriting firm, have few opportunities to raise capital. Often, they find that their only means of obtaining needed financing is from friends, family, or small offerings to a limited number of people. The Internet may provide the medium small businesses need since it furnishes an opportunity to reach millions of people at practically no cost.

Early Electronic Securities Activities

In early 1995, the first securities offerings were advertised on-line by a few small companies. These businesses used the Internet to reach potential investors around the world. In addition, many of these businesses offered the delivery of their prospectus electronically. This is particularly cost effective because it allows a prospective investor to view the prospectus on-line, and then download or print it at no cost to the issuing company. These initial on-line offerings met with various degrees of success. However, regardless of their results, the potential was obvious.

It isn't hard to imagine that these electronic securities activities were beginning to receive attention at the Securities and Exchange Commission (SEC). The 1933 and 1934 Securities Acts broadly govern the advertisement, sale, and distribution of securities.(1) While the SEC has been open to the use of new technologies in the past, their use generally requires extensive SEC examination.(2) Additionally, most approved electronic systems operate through regulated entities such as a broker-dealer. In the case of many of the early Internet offerings, however, the companies did not have SEC approval, and in most instances, a regulated entity was not involved.

To deal with these uncharted waters, the SEC, in October 1995, distributed an official release ("October Release") that provided much of the needed framework for the electronic distribution of securities information.(3) This release superseded a February 1995, interpretive letter,(4) and provided procedures and rules for issuing companies to comply with as they explored the Internet's potential.

Specifically, the October Release furnished rules for when the electronic delivery of information provides sufficient notice to investors, how an investor can be provided with access to information, and what constitutes evidence that electronic...