Disclosure requirements for bonds in an electronic era.

• Author: Arey, Patrick K.

The explosion of Internet/electronic commerce has finally come to government finance.

* Marketers compete with one another to offer electronic bidding facilities to state and local governments for their bonds.

* Some bidding services actively promote programs that allow potential investors to bid on single maturities within an issue.

* Issuers are asked when they will begin posting their offering documents on their Web sites.

* One national underwriting firm is promoting the use of tender offers to purchase bonds on the open market so that bonds not eligible for advance refunding may be refunded and makes extensive use of its Web site to provide information and forms to tendering bond owners.

* Working groups are now routinely transmitting documents by E-mail, saving thousands of dollars in expenses for overnight delivery services.

* Software companies are actively promoting document drafting systems that permit many members of a working group to make separate comments onto a single electronic document.

Such new technologies offer both opportunities and potential dangers to issuers.

During the past 10 years, the public-finance market has been subjected to increasing regulatory oversight, making many issuers cautious about using the Internet to market their bonds and disseminate their disclosure documents. The first question often asked when considering marketing and issuing bonds over the Internet is: What will the Securities and Exchange Commission (SEC) say?

The SEC first addressed the use of electronic media to disseminate offering documents in a no-action letter issued February 1995. The principles for electronic disclosure described in this no-action letter were formally set in Release No. 33-7233.

The SEC's interpretive release and subsequent releases encourage issuers to use electronic media to disseminate offering and disclosure documents. Several general principles governing this encouragement are discernable from the SEC's releases:

* the medium of transmission of disclosure documents is less important to the SEC than their content,

* electronic disclosure documents must be prepared, updated, and delivered in the same manner as paper documents,

* electronic disclosures must convey all material and required information to investors in a manner required for equivalent paper documents, and

* responsibilities and liabilities under federal securities laws apply equally to paper and electronic documents.

Despite the SEC's permissive attitude in its releases and supportive comments, issuers need to consult these releases for certain additional principles stated by the SEC that are designed to ensure that recipients of electronic disclosure documents receive the same information that they are entitled to receive in paper form.

The SEC's definition of electronic media covers audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, bulletin boards, Internet Web sites, and computer networks (e.g., local area networks and commercial on-line services) which are used to provide documents required by the federal securities laws to investors, security holders, and issuers and buyers.

Ground Rules

Content More Important Than Format. Under an electronic disclosure environment, investors must continue to receive the same information they would receive in a paper-based disclosure environment. Issuers may revise the format of their paper-based disclosure documents to facilitate the posting or dissemination of electronic-based documents. This point is perhaps more important in the world of registered securities, such as stocks and corporate debentures, where the SEC has rules requiring specific document formats for prospectuses, proxies, and annual reports, including type sizes, use of bold face type, and red ink on legends. While the SEC has not dictated disclosure formats in the public-finance markets, it has encouraged the use of various voluntary standards and formats, such as those promoted by the Government Finance Officers Association (GFOA). Issuers should feel free to modify the forms of their disclosure documents to facilitate electronic dissemination and posting upon Internet Web sites. Of course, careful attention should be paid to clarity of the presentation and inclusion of all material information required for the investor to make an informed decision; nevertheless, the issuer may modify presentation of the information to make electronic dissemination easier.

Examples of such modifications include moving the preliminary offering legend from the left side of the cover sheet to the top of the cover page and structuring the document so pagination is less important.

Consent of Recipient of Electronic Disclosure. One of the most important and difficult steps to initiating an electronic disclosure program is the requirement that the investor receiving the electronic disclosure must provide the issuer, underwriter, or...