Selling Securities On The Net

Tuesday, October 8, 2002

Stacey Nader, NY Business Law Today, http://

Better Business Management & Planning Practices

Morrison Cohen Singer & Weinstein, New York
Vol. 11, No. 6, Pgs. 46-50

Overview:
Surveys SEC regulation of online public offerings. Clarifies the requirements for delivering a prospectus and the liability for hyperlinks. Enumerates criteria for online Regulation D offerings, and indicates how to minimize blue-sky registrations.

Online prospectuses
The SEC and the state regulators permit, even encourage, issuers to undertake online public offerings, though they are still far from everyday occurrences. The issuer prepares, updates, and delivers an online prospectus as it would a paper document, although the SEC allows appropriate changes in paper-based standards, including red ink and graphics. To meet the delivery requirements, the issuer putting a prospectus on its website must give investors separate notice, most likely by e-mail. The SEC requires that investors get easy access to the prospectus, such as the ability to link to it through a single password. Evidence of delivery is another SEC concern. The company must either obtain evidence that an investor actually received the prospectus (e.g., a return-receipt e-mail or verification that the investor accessed, downloaded, or printed out the prospectus) or procure the investor's informed consent to receive it from the website and then assure proper notice and access. The SEC allows this consent to be written, electronic, or telephonic.

Hyperlink dangers
The issuer must monitor the content of its website whenever it posts a prospectus. The SEC has announced three nonexclusive criteria for determining when the issuer is liable for third parties' material misstatements in hyperlinked information: the link's context, the risk of confusing investors, and the presentation of the link. For example, the issuer's hyperlink to atypically favorable information or its use of a screen layout to make one link more conspicuous than another might be deemed an endorsement of that link. For protection, use a transitional screen indicating that the investor who has clicked on the link is moving to another website, which contains information prepared by third parties and not endorsed by the issuer.

Reg. D procedure
For an online offering under Rule 505 or 506 of Regulation D, the issuer can qualify investors as accredited or sophisticated and post a private-offering notice on a password-guarded page accessible only to such investors. The issuer will not be deemed to have engaged in the general solicitation or general advertising prohibited by Rule 502(c), provided it follows the specified procedure in qualifying investors. Potential buyers are invited first to fill in a questionnaire, assessing whether they are accredited or sophisticated. Only then can the investors access the password-guarded page and purchase securities in transactions posted there.

Blue-sky exemptions
To ascertain whether an Internet offering "occurs" within a particular state (which can then assert jurisdiction) is problematical, since any computer user can access a website displaying offering documents. One NASAA resolution encourages states to exempt an Internet offering from registration requirements if certain conditions exist. The documents must declare or imply that the securities are not offered to residents of those states and that neither the issuer nor its agents specifically direct an offer to anyone in those states. Most states have dealt with this problem. New York's statute resembles the NASAA resolution, while Delaware's is slightly harder to satisfy. In general, an Internet offering does not have to be registered in any state in which it explicitly declares itself to be invalid.

Business Law Today, American Bar Association, Section of Business Law, 750 N. Lake Shore Drive, Chicago, IL 60611.

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