This release is designed to provide guidance to issuers of all types, including operating companies, investment companies and municipal securities issuers, as well as market intermediaries, on several issues involving the application of the federal securities laws to electronic media. In developing this guidance, we considered the significant benefits that investors can gain from the increased use of electronic media. We also considered the potential for electronic media, as instruments of inexpensive, mass communication, to be used to defraud the investing public.4 We believe that the guidance advances our central statutory goals: ensuring full and fair disclosure to investors; promoting the public interest, including investor protection, efficiency, competition and capital formation; and maintaining fair and orderly markets. One of the key benefits of electronic media is that information can be disseminated to investors and the financial markets rapidly and in a cost-effective and widespread manner. Our recently adopted rules permitting increased communications with security holders and the markets in connection with business combinations and similar transactions should enable issuers to take further advantage of this benefit.5 Thus far, we have not extended the same flexible treatment to securities offerings aimed at raising capital. For these offerings, we are considering separately the liberalization of communications by issuers and other market participants.6
The 1995 Release stated that consent to electronic delivery could relate to all documents to be delivered by or on behalf of a single issuer.24 The 1995 Release also stated that an issuer could rely on consent obtained by a broker-dealer or other market intermediary.25 Some securities lawyers have questioned the permissible scope of consents that are obtained by broker-dealers or banks (or their agents) from investors who hold securities of multiple issuers in their brokerage, trust or other accounts. Specifically, they have asked whether an investor can consent to electronic delivery of all documents of any issuer in which that investor buys or owns securities through a particular intermediary. We believe that an investor may give a global consent to electronic delivery -- relating to all documents of any issuer -- so long as the consent is informed.26 Given the broad scope of a global consent and its effect on an investor's ability to receive important documents, we believe intermediaries should take particular care to ensure that the investor understands that he or she is providing a global consent to electronic delivery. For example, a global consent that is merely a provision of an agreement that an investor is required to execute to receive other services may not fully inform the investor. To best inform investors, broker-dealers could obtain consent from a new customer through an account-opening agreement that contains a separate section with a separate electronic delivery authorization, or through a separate document altogether. We believe that a global consent to electronic delivery would not be an informed consent if the opening of a brokerage account were conditioned upon providing the consent.27 Therefore, absent other evidence of delivery,28 we believe that if the opening of an account were conditioned upon providing a global consent, evidence of delivery would not be established. Similarly, because of the broad scope of a global consent, an investor should be advised of his or her right to revoke the consent at any time and receive all covered documents in paper format. We recognize that a system allowing an investor to revoke consent to electronic delivery with respect to some issuers' documents, but not others, may be difficult to administer. An intermediary might be uncertain about whether or not it has complied with its delivery obligations. Thus, intermediaries, if they wish, may require revocation on an "all-or-none" basis, provided that this policy is adequately disclosed when the consent is obtained. As noted in the 1995 Release, an informed consent must specify the type of electronic media to be used (for example, a limited proprietary system or an Internet web site).29 This is particularly true for global consents where multiple documents may be delivered through different media. An investor should not be disadvantaged by inadvertently consenting to electronic delivery through a medium that is not compatible with the investor's computer hardware and software.30 Although a global consent must identify the various types of electronic media that may be used to constitute an informed consent, it need not specify the medium to be used by any particular issuer. Additionally, the consent need not identify the issuers covered by the consent. If the consent does identify the covered issuers, it also may provide that additional issuers can be added at a later time without further consent. Investors cannot be required to accept delivery via additional media at a later time without further informed consent.31
Because of the increasing use by issuers of web sites to communicate in the ordinary course of business with their security holders, customers, suppliers and others, issuers have asked us for guidance on the permissible content of their Internet communications when they are in registration.62 An issuer in registration must consider the application of Section 5 of the Securities Act63 to all of its communications with the public.64 In our view, this includes information on an issuer's web site as well as information on a third-party web site to which the issuer has established a hyperlink. The Securities Act and accompanying regulations currently limit information about an offering that issuers and persons acting on their behalf may provide to investors to the content of the Section 10 prospectus and any permissible communications under available Securities Act safe harbors.65 Thus, information on a third-party web site to which an issuer has established a hyperlink that meets the definition of an "offer to sell," "offer for sale" or "offer" under Section 2(a)(3) of the Securities Act raises a strong inference that the hyperlinked information is attributable to the issuer for purposes of a Section 5 analysis.66 To ensure compliance with Section 5, an issuer in registration should carefully review its web site and any information on third-party web sites to which it hyperlinks.
Increasingly, issuers and broker-dealers are conducting public securities offerings online, using the Internet, electronic mail and other electronic media to solicit prospective investors. Examples of these electronic communications include investor questionnaires on investment qualifications, broker-dealer account-opening procedures and directives on how to submit indications of interest or offers to buy in the context of a specific public offering.69 These developments present both potential benefits and dangers to investors.70 On the positive side, numerous "online brokers" appear to have begun to give individual investors more access to public offerings, including initial public offerings, or IPOs.71 Still, dangers accompany these expanded online investment opportunities. Retail investors often are unfamiliar with the public offering process generally, and, in particular, with new marketing practices that have evolved in connection with online public offerings. We are concerned that there may be insufficient information available to investors to enable them to understand fully the online public offering process. We also are concerned that investors are being solicited to make hasty, and perhaps uninformed, investment decisions.72 Two fundamental legal principles should guide issuers, underwriters and other offering participants in online public offerings. First, offering participants can neither sell, nor make contracts to sell, a security before effectiveness of the related Securities Act registration statement.73 A corollary to this principle dictates that "[n]o offer to buy ... can be accepted and no part of the purchase price can be received until the registration statement has become effective."74 Second, until delivery of the final prospectus has been completed, written offers and offers transmitted by radio and television cannot be made outside of a Section 10 prospectus except in connection with business combinations.75 After filing the registration statement, two limited exceptions provide some flexibility to offering participants to publish notices of the offering.76 Following effectiveness, offering participants may disseminate sales literature and other writings so long as these materials are accompanied or preceded by a final prospectus.77 Oral offers, in contrast, are permissible as soon as the registration statement has been filed. Offering participants may use any combination of electronic and more traditional media, such as paper or the telephone, to communicate with prospective investors, provided that use of these media is in compliance with the Securities Act.
These key legal principles must underpin the development of appropriate procedures for online offerings. To date, the Division of Corporation Finance has reviewed numerous procedures in connection with online distributions of IPOs. The Division also has issued a no-action letter regarding permissible procedures for the use of the Internet in IPOs.78 We understand, however, that a number of online brokers have urged that we make additional regulatory accommodations to facilitate online offerings. We appreciate the benefits that technology brings to the offering process and fully support the need to craft a regulatory system that maximizes these benefits. We also are mindful of our investor protection mandate and the fundamental principles established by the Securities Act for the offer and sale of securities. Many of the procedures urged upon us by online brokers may be properly the subject of regulatory action. Accordingly, in this release, we do not prescribe any specific procedures that must be followed. Instead, we will continue to analyze this area as practice, procedures and technology evolve, with a view to possible regulatory action in the future. Additionally, the Commission staff will continue to review procedures submitted in connection with online offerings. 2b1af7f3a8