New Jersey Law Journal,
July 2, 2001
Copyright 2001 American Lawyer Newspapers Group, Inc.
New Jersey Law Journal
July 2, 2001
LENGTH: 1981 words
HEADLINE: Internet Law Avoiding E-Security Violations Adoption of a
Web site policy and use of safe-harbor language can help prevent litigation
generated in part by e-postings
BYLINE: JONATHAN BICK
THE AUTHOR IS AN ADJUNCT PROFESSOR OF LAW AT RUTGERS LAW SCHOOL AND
PACE LAW SCHOOL. HE IS THE AUTHOR OF 101 THINGS YOU NEED TO KNOW ABOUT
INTERNET LAW (RANDOM HOUSE 12/00).
*The widespread use of the Internet by companies to raise money and
to satisfy securities market reporting requirements carries with it
the potential for securities law liability. However, through cursory
monitoring of information posted on a company's Web site most, if not
all, such liability can be avoided or minimized.
*To be specific, five simple steps should be taken. These steps are
(1) the adoption of a Web site policy, (2) the use of safe-harbor language
and disclaimers, (3) reviewing postings, (4) implementing proper site
programming and (5) eliminating outdated material. (The safe harbors
provided by the Private Securities Litigation Reform Act of 1995 apply
only in private actions in federal court, subject to pending legislation
and do not apply to disclosures in financial footnotes, initial public
offerings, tender offers and certain other excluded types of filings.)
*Businesses have found that a Web site can be a remarkable apparatus,
not just from an e-commerce perspective, but from a fund-raising standpoint
as well. Using a Web site, a company can increase the speed, accuracy
and flexibility of information that it must disseminate to its shareholders,
potential investors and the public. Companies have also found that the
use of a Web site can be a cost-effective method for the dissemination
*The Securities and Exchange Commission has recognized that the use
of electronic media enhances the efficiency of the securities markets
as a whole. It also suggests that the Internet may disseminate information
in a more equitable manner than traditional paper-based methods. (See,
Securities Act Release No. 33-7233, (Oct. 6, 1995) (addressing the use
of electronic media for delivery purposes).)
*The SEC has considered the use of the Internet to disclose information,
to satisfy reporting requirements and to offer securities. These considerations
have been widely disseminated and have been coupled with warnings of
potential liability. The SEC had also given meaningful guidance as to
how such liability could be avoided. Such guidance can also be found
in SEC rule making and litigation with respect to broadcasting and publishing,
which pre- dates the Internet.
*First, briefly consider the relevant liability scheme under the Securities
Act of 1933 and the Securities and Exchange Act of 1934, together with
their attendant rules.
*The most significant liability provisions are threefold. First, there
is rule 10b-5 of the Securities and Exchange Act, which prohibits untrue
or misleading statements of material fact in connection with the purchase
or sale of securities. Second, there is '12(a)(2) of the Securities
Act, 15 USC ' 771, which prohibits offering or selling a security by
use of an untrue or misleading statement of material fact. Third, there
is '11 of the Securities Act, 15 USC ' 77k, which provides liability
for making an untrue or misleading statement of material fact in a registration
*Forward-looking financial statements or exaggerated product information,
when posted on a Web site to raise funds, causes the most legal difficulties.
Forward-looking statements typically communicate corporate announcements,
financial projections, management objectives and predictions of future
products and services. Companies that use the Internet for fund raising
can avoid the securities liability associated with these statements
simply by having a policy that prohibits their e-posting or requires
the use of "safe harbor" language.
*The Private Litigation Securities Reform Act of 1995, 15 USC ''77z-2,
78u-5, provides a safe harbor for publicized information. The PLSRA
requires that such information is identified as a forward-looking statement
and is accompanied by meaningful cautionary statements identifying important
factors that can cause actual results to differ materially from those
projected in the forward-looking statement.
*Another prominent problem for companies in the process of offering
securities are the '5 limitations of the Securities Act, which prohibit
offers to buy or sell any security unless a registration statement has
been filed covering that security (or unless an exemption is available).
See, Securities Act Release No. 33-7233. Securities law difficulties
usually arise due to the erroneous determination of an offer.
*The SEC has issued four interpretive releases concerning electronic
delivery, provided guidance for Internet offerings and addressed issuer
liability for Web sites. Companies can simply review these releases
to develop their own guidelines and practices. (See, 1995 -- Use of
Electronic Media for Delivery Purposes; 1996 -- Use of Electronic Media
by Broker Dealers, Transfer Agents and Investment Advisors for Delivery
of Information; 1998 -- Use of Internet Web Sites to Offer Securities,
Solicit Securities Transitions or Advertise Investment Services Offshore;
and 2000 -- Use of Electronic Media.)
*Most companies post current information on their Web sites. This information
typically includes press releases, product information, SEC filings
and news articles. The company prepares some of the material, and the
rest is created by third parties. Such postings are usually found to
be an efficient and an effective way to disclose information.
*Normally, companies will post Internet information in one of two ways.
Information may be placed in its entirety on a Web site, or an e-pathway
(electronic door) to the information may be placed on the Web site by
*It is advisable to disseminate information by more than one means.
Currently, the posting of information on a Web site is not universally
accepted to constitute public dissemination for SEC purposes. It is
also advisable to label all e-postings with dates and a disclaimer stating,
"material is accurate as of its label date and no obligation or
intention to make updates or corrections exists." Such labeling
and disclaimer posting should be displayed prominently.
*In addition to the use of disclaimers, business organizations should
formulate and publish policies for regularly reviewing its e-security-related
postings. This action, coupled with an education program directed to
the technology staff, will be a good defense to a charge of intentional
misrepresentation in the event that an individual fails to delete dated
information that is no longer true.
*Disclaimers and standard operating procedures are not cure-alls. A
company in the process of registration has special concerns. Although
its disclaimer may protect it from some legal difficulties by stating
that the e-posting does not constitute an offer to sell or a solicitation
to buy securities, it may result in an unlawful attempt to create interest
in a proposed offering.
*The most acceptable way to prevent this legal difficulty is to limit
the security-related content of a company's Web site during the registration
process. The SEC has stated that advertisements, SEC-related reports
and notices and press announcements are allowed. (See, Use of Electronic
Media, Securities Act Release No.33-7856, 65 Fed. Reg. 25,843 (May 24,
2000). (This release was the SEC's attempt to provide guidance on the
use of the Internet by all kinds of issuers, including operating companies,
investment companies and municipal securities issuers, as well as market
*Since employees may also become owners of the company for which they
work, the SEC requires that companies be treated as potential investors.
This means that any e-communication to an employee should be treated
the same as external communications. Therefore, despite the fact that
an Web site might be labeled confidential, securities-related information
should be coupled with appropriate disclaimers.
*In addition, Internet communication technologies should be deployed
to limit access to e-securities-related information. As suggested above,
a company should also reduce this procedure to writing and use it to
educate appropriate employees. Such action will be useful as part of
a defense effort in the event of legal difficulty.
Endorsed and Approved
*Third-party content and hyperlinks to third-party content habitually
appear on Web sites. These parts of a site may create liability because
the information will be imputed to the Web site owner, according to
the SEC, which suggests that a company is liable for statements made
by third parties that are endorsed or approvable.
*The SEC provided security issuers with guidance about responsibility
for e- content under the anti-fraud provisions of the federal securities
laws. A securities issuer is responsible for third-party information
if it has involved itself in the preparation of the information or if
it expressly or implicitly endorses or approves it.
*Although it is clear that an issuer is responsible for its own actions,
it is less clear what constitutes endorsement and/or approval. As a
result, the SEC stated that in the case of hyperlinked information,
liability would depend on certain factors related to the hyperlink.
*The SEC catalogs three nonexclusive factors that can be used to determine
if endorsement or approval has occurred. First, does the context of
the hyperlink demonstrates adoption? Second, is there confusion as to
the source of the information? Third, was the hyperlinked information
presented to demonstrate adoption? (See, Securities Act Release No.
33 - 7856.)
*Most companies use the Internet to post information that is available
to the public. E-posted information, more often than not, contains corporate,
investor and product information. Web sites are thus useful vehicles
for communicating with customers, employees and shareholders. However,
they may also give rise to additional legal liability. An easy and inexpensive
way to reduce or eliminate this liability is to monitor e-posting with
a few questions in mind.
*Is a trained person regularly reviewing the e-postings, including the
hyperlinks? Has the information in the e-postings been released on the
Internet alone, or has it been a part of press releases as well? Is
the hyperlinked content lawful? Have all e-postings, including material
prepared by third parties, been coupled with approved disclaimers prior
*Without a set of operating procedures to enact the company's e-policies,
the company's Web site can become a source of legal difficulties, including
an invitation for securities class-action litigation.
*It should also be remembered that related problems arise when employees
have regular access to a company's Web site. Without consistent use
of high- quality monitoring procedures, Internet postings by company
insiders may result in legal difficulties.
*In sum, a company should subject its Internet postings to the same
analysis as a press release or an SEC filing. E-posting procedures should
ensure that financial and other information placed on the company's
Web site goes through meaningful internal review. Only people who are
familiar with the legal risks involved in public disclosures should
oversee all phases of e-posting of securities-related information. Only
documents that a company has released as a press release should be posted
on its investor relation's site. And all e- postings should be dated.
*In addition, the Private Securities Litigation Reform Act of 1995 provides
a safe harbor for certain forward-looking statements without incurring
additional liability to investors if their expectations were not realized.
Safe-harbor language has been a successful shield in a company's arsenal
against shareholder litigation generated in part by e-postings.
LOAD-DATE: July 2, 2001