Public Company Web Sites: A Marketing Tool Subject To Securities Laws

Following the enactment of the Sarbanes-Oxley Act, disclosures by public companies via their Web sites are increasingly required or encouraged. With the implementation of these new rules and the growth of the Internet, investors, as well as prospective investors, increasingly are relying upon a company's Web site for investment information. Public companies should recognize the value of their Web sites as marketing and investor-relations tools, subject to the boundaries of applicable legal standards and constraints.

The Securities and Exchange Commission (SEC) has stated that “[t]he federal securities laws apply in the same manner to the content of [companies'] Web sites as to any other statements made by or attributable to them.” For example, Web site content that is inaccurate or misleading may cause the company to be found liable to an investor who incurred a loss by buying or selling the stock of the company in reliance upon such content. Additionally, companies and their officers may be held criminally liable for misleading or false information posted on the company's Web site. Last year, the CEO of eConnect was sentenced to over 8 years in federal prison after pleading guilty to three counts of securities fraud and one count of criminal contempt. The SEC had charged eConnect and its CEO with securities fraud in connection with a scheme to artificially inflate eConnect's stock price using, among various techniques, false statements posted on its Web site. According to the SEC, during the period when the false statements were posted on the Web site, eConnect's stock increased by over 500%.

Under Scrutiny

With this potential for liability, a company's Web site should be subject to the same scrutiny and review as any other public statement made by a company (for example, press releases). The content of a company's Web site, particularly the investor-relations content, should contain information and disclosure that is consistent with the company's public filings as well as the investor relations philosophy of the company.

To ensure compliance with legal standards, a company should assign the responsibility of reviewing and approving new material posted to the company's Web site to certain, select persons. These persons should be familiar with the legal standards applicable to public disclosures and Web site postings, as well as knowledgeable about the company, its business and recent or pending developments in its business. A company should also periodically and systematically review all information on its Web site for the purpose of deleting or updating information that, although originally accurate, might have become potentially misleading or inaccurate over time.

In reviewing Web site content, a company should ensure that older information (including press releases and SEC filings) is segregated into a section that includes a disclaimer that the information contained there should not be considered current and may no longer be accurate. A recent SEC enforcement action demonstrates the liability a company and its executive officers may incur if they do not comply with this practice. In 2002, the SEC charged Thurlow Funds, a mutual fund company, with securities fraud for posting outdated and misleading performance returns on its Web site. According to the SEC, as late as December 2000, the mutual fund company Web site prominently proclaimed returns of over 400%, even though such returns only represented the period from the fund's inception through March 2000.

Furthermore, to reduce the risk of a claim that Web site content is outdated or omits recent material developments, any postings should be dated and the company should disclaim any duty to update (eg, “The information posted is as of the date indicated and, to our knowledge, was timely and accurate when posted. We are under no obligation to update or remove outdated information other than as required by applicable law or regulation.”).

Looking Forward

Another disclaimer and safe-harbor that a company should invoke is that provided by the Private Securities Litigation Reform Act (PSLRA). The PSLRA provides that a forward-looking statement (eg, projections, future expectations or predictions) made by a company is protected from a federal securities claim if it is identified as a forward-looking statement and accompanied by meaningful cautionary statements identifying factors that could cause actual results to differ materially from those projected. To take advantage of this safe harbor, a company Web site should include cautionary language at the bottom of the main screen of the Web site, on the first page of the investor-relations section and on any other pages that are intended primarily for investors or that contain statements that could be deemed forward-looking.

While Web site content can subject a company to liability under the securities laws, it can also help a company avoid liability. Regulation FD (fair disclosure) prohibits a public company from selectively disclosing material, nonpublic information to market professionals, such as broker-dealers and analysts, or to its investors if it is reasonably foreseeable that investors will trade based on the information. Accordingly, a company should utilize its Web site as another means by which to announce public conference calls and presentations and provide access to such calls and presentations through the Web site, thereby turning what could be construed as a private event into a public forum. Under Regulation FD, so long as adequate advance notice has been provided, a simultaneous webcast of events will satisfy Regulation FD's requirement for simultaneous public dissemination of material nonpublic information that is being disclosed.

Keep in mind, however, that while a company may use its Web site as part of the broad disclosure process of information, the current SEC stance is that a Web site posting alone is insufficient to constitute public dissemination of that information for purposes of Regulation FD. While this stance is likely to change as the Internet becomes increasingly prevalent and accessible to all, for now, in order to satisfy Regulation FD, a company must utilize Web site disclosure in combination with other methods of dissemination (eg, filing a press release, Form 8-K) that provide broad, non-exclusionary distribution of the information.

The Not-So-Innocent Link

Sometimes it may not even be the content on the company's Web site that can create liability. What might seem as innocuous as hyperlinking to information contained on a third-party Web site from the company Web site may in fact lead to claims of securities fraud against the company. The SEC has indicated that in certain instances the company will be deemed to have adopted the statements made on the other Web site and, therefore, will have the responsibility for the statements as if the company itself had made the statements. While there is no way to determine for certain whether hyperlinked information has been adopted, the SEC has set forth a series of factors to consider in deciding whether information on a hyperlinked third-party Web site has been adopted. Among the factors to consider are the context of the hyperlink, the risk of confusion and the presentation of the hyperlinked information.

Whether third-party information to which a hyperlink has been established is attributable to the company will be influenced by what the company says about the hyperlink or what is implied by the context in which the company places the hyperlink. A company might explicitly endorse the hyperlinked information, or the hyperlink might be used to suggest that the hyperlinked information supports a particular assertion on the company Web site. For example, the hyperlink may accompany a statement such as, “As stated on ABC site, we are the leading manufacturer in our industry.” Even when a company remains silent about the hyperlink, the context may still imply that it is attributable to the company.

Another factor to consider in determining whether the hyperlinked information has been adopted is whether any precautions against investor confusion about the source of the information has been taken. If the company makes the information accessible only after a visitor to the company Web site has been presented with a disclaimer that clearly indicates that the visitor is leaving the company Web site and the information viewed is not the company's, then the information is less likely attributable to the company. Likewise, there is less opportunity for confusion if the company ensures that access to the hyperlinked information is preceded by a disclaimer which states that the company is neither responsible for nor endorses the information. The SEC has specifically stated, however, that these disclaimers and statements cannot insulate a company from liability if there are other facts and circumstances indicating that the company has adopted the information.

The presentation of the hyperlinked information is the third factor to consider when determining whether the company has adopted the hyperlinked information. Examples of risky practices that a company should avoid include selectively providing hyperlinks so that information accessed is not representative of available information, and selectively establishing and terminating hyperlinks to third-party Web sites depending on how favorable the linked information is to the company. Additionally, screen layouts that disproportionately influence a visitor's decision to view particular hyperlinks through the use of different color, type face or size suggests that the company has adopted the hyperlinked information to which the company is drawing investor attention. Note that the SEC has also stated that when hyperlinked information is framed or inlined, there is greater risk of investor confusion.

Hyperlinking can lead to liability, even if a company has the best of intentions. The periodic review of Web site content should include review of the outside links posted on the Web site. Make sure that the company Web site avoids framing and deep linking and utilizes exit screens before a hyperlink takes a visitor to third-party information. A company Web site should never include reports of financial analysts, or hyperlink to analyst reports. If the company wants to list analysts who report on the company, all securities analysts should be listed ' not just those who issue positive reports on the company.

Be Careful, Not Afraid

Compliance with applicable legal standards should always be the guiding principle of Web site content, but bear in mind that the content of the Web site provides a company with the opportunity to demonstrate good corporate governance and potentially increase its corporate governance rating issued by the numerous corporate governance rating services. In addition to items required to be posted by the SEC and the rules of your company's applicable listing exchange, consider posting additional materials on your corporate governance web page, such as: a list of directors, including their biographies and photographs; a list of board committees, including names of members and brief descriptions of committee purposes; copies of the charter for each board committee; copies of articles of incorporation and bylaws; a description of how investors can contact the board of directors; and any other policies the company wishes to make public (eg, information that may positively affect your corporate governance ratings).

As the Internet and technology continue to evolve, the body of securities laws that are applicable to Web site content and disclosures undoubtedly will evolve as well. Technology provides investors with unparalleled access to potentially useful information. Companies should be mindful of the opportunities that accompany that access, as well as the corresponding liabilities if appropriate care is not taken when availing oneself of that opportunity.

Following the enactment of the Sarbanes-Oxley Act, disclosures by public companies via their Web sites are increasingly required or encouraged. With the implementation of these new rules and the growth of the Internet, investors, as well as prospective investors, increasingly are relying upon a company's Web site for investment information. Public companies should recognize the value of their Web sites as marketing and investor-relations tools, subject to the boundaries of applicable legal standards and constraints.

The Securities and Exchange Commission (SEC) has stated that “[t]he federal securities laws apply in the same manner to the content of [companies'] Web sites as to any other statements made by or attributable to them.” For example, Web site content that is inaccurate or misleading may cause the company to be found liable to an investor who incurred a loss by buying or selling the stock of the company in reliance upon such content. Additionally, companies and their officers may be held criminally liable for misleading or false information posted on the company's Web site. Last year, the CEO of eConnect was sentenced to over 8 years in federal prison after pleading guilty to three counts of securities fraud and one count of criminal contempt. The SEC had charged eConnect and its CEO with securities fraud in connection with a scheme to artificially inflate eConnect's stock price using, among various techniques, false statements posted on its Web site. According to the SEC, during the period when the false statements were posted on the Web site, eConnect's stock increased by over 500%.

Under Scrutiny

With this potential for liability, a company's Web site should be subject to the same scrutiny and review as any other public statement made by a company (for example, press releases). The content of a company's Web site, particularly the investor-relations content, should contain information and disclosure that is consistent with the company's public filings as well as the investor relations philosophy of the company.

To ensure compliance with legal standards, a company should assign the responsibility of reviewing and approving new material posted to the company's Web site to certain, select persons. These persons should be familiar with the legal standards applicable to public disclosures and Web site postings, as well as knowledgeable about the company, its business and recent or pending developments in its business. A company should also periodically and systematically review all information on its Web site for the purpose of deleting or updating information that, although originally accurate, might have become potentially misleading or inaccurate over time.

In reviewing Web site content, a company should ensure that older information (including press releases and SEC filings) is segregated into a section that includes a disclaimer that the information contained there should not be considered current and may no longer be accurate. A recent SEC enforcement action demonstrates the liability a company and its executive officers may incur if they do not comply with this practice. In 2002, the SEC charged Thurlow Funds, a mutual fund company, with securities fraud for posting outdated and misleading performance returns on its Web site. According to the SEC, as late as December 2000, the mutual fund company Web site prominently proclaimed returns of over 400%, even though such returns only represented the period from the fund's inception through March 2000.

Furthermore, to reduce the risk of a claim that Web site content is outdated or omits recent material developments, any postings should be dated and the company should disclaim any duty to update (eg, “The information posted is as of the date indicated and, to our knowledge, was timely and accurate when posted. We are under no obligation to update or remove outdated information other than as required by applicable law or regulation.”).

Looking Forward

Another disclaimer and safe-harbor that a company should invoke is that provided by the Private Securities Litigation Reform Act (PSLRA). The PSLRA provides that a forward-looking statement (eg, projections, future expectations or predictions) made by a company is protected from a federal securities claim if it is identified as a forward-looking statement and accompanied by meaningful cautionary statements identifying factors that could cause actual results to differ materially from those projected. To take advantage of this safe harbor, a company Web site should include cautionary language at the bottom of the main screen of the Web site, on the first page of the investor-relations section and on any other pages that are intended primarily for investors or that contain statements that could be deemed forward-looking.

While Web site content can subject a company to liability under the securities laws, it can also help a company avoid liability. Regulation FD (fair disclosure) prohibits a public company from selectively disclosing material, nonpublic information to market professionals, such as broker-dealers and analysts, or to its investors if it is reasonably foreseeable that investors will trade based on the information. Accordingly, a company should utilize its Web site as another means by which to announce public conference calls and presentations and provide access to such calls and presentations through the Web site, thereby turning what could be construed as a private event into a public forum. Under Regulation FD, so long as adequate advance notice has been provided, a simultaneous webcast of events will satisfy Regulation FD's requirement for simultaneous public dissemination of material nonpublic information that is being disclosed.

Keep in mind, however, that while a company may use its Web site as part of the broad disclosure process of information, the current SEC stance is that a Web site posting alone is insufficient to constitute public dissemination of that information for purposes of Regulation FD. While this stance is likely to change as the Internet becomes increasingly prevalent and accessible to all, for now, in order to satisfy Regulation FD, a company must utilize Web site disclosure in combination with other methods of dissemination (eg, filing a press release, Form 8-K) that provide broad, non-exclusionary distribution of the information.

The Not-So-Innocent Link

Sometimes it may not even be the content on the company's Web site that can create liability. What might seem as innocuous as hyperlinking to information contained on a third-party Web site from the company Web site may in fact lead to claims of securities fraud against the company. The SEC has indicated that in certain instances the company will be deemed to have adopted the statements made on the other Web site and, therefore, will have the responsibility for the statements as if the company itself had made the statements. While there is no way to determine for certain whether hyperlinked information has been adopted, the SEC has set forth a series of factors to consider in deciding whether information on a hyperlinked third-party Web site has been adopted. Among the factors to consider are the context of the hyperlink, the risk of confusion and the presentation of the hyperlinked information.

Whether third-party information to which a hyperlink has been established is attributable to the company will be influenced by what the company says about the hyperlink or what is implied by the context in which the company places the hyperlink. A company might explicitly endorse the hyperlinked information, or the hyperlink might be used to suggest that the hyperlinked information supports a particular assertion on the company Web site. For example, the hyperlink may accompany a statement such as, “As stated on ABC site, we are the leading manufacturer in our industry.” Even when a company remains silent about the hyperlink, the context may still imply that it is attributable to the company.

Another factor to consider in determining whether the hyperlinked information has been adopted is whether any precautions against investor confusion about the source of the information has been taken. If the company makes the information accessible only after a visitor to the company Web site has been presented with a disclaimer that clearly indicates that the visitor is leaving the company Web site and the information viewed is not the company's, then the information is less likely attributable to the company. Likewise, there is less opportunity for confusion if the company ensures that access to the hyperlinked information is preceded by a disclaimer which states that the company is neither responsible for nor endorses the information. The SEC has specifically stated, however, that these disclaimers and statements cannot insulate a company from liability if there are other facts and circumstances indicating that the company has adopted the information.

The presentation of the hyperlinked information is the third factor to consider when determining whether the company has adopted the hyperlinked information. Examples of risky practices that a company should avoid include selectively providing hyperlinks so that information accessed is not representative of available information, and selectively establishing and terminating hyperlinks to third-party Web sites depending on how favorable the linked information is to the company. Additionally, screen layouts that disproportionately influence a visitor's decision to view particular hyperlinks through the use of different color, type face or size suggests that the company has adopted the hyperlinked information to which the company is drawing investor attention. Note that the SEC has also stated that when hyperlinked information is framed or inlined, there is greater risk of investor confusion.

Hyperlinking can lead to liability, even if a company has the best of intentions. The periodic review of Web site content should include review of the outside links posted on the Web site. Make sure that the company Web site avoids framing and deep linking and utilizes exit screens before a hyperlink takes a visitor to third-party information. A company Web site should never include reports of financial analysts, or hyperlink to analyst reports. If the company wants to list analysts who report on the company, all securities analysts should be listed ' not just those who issue positive reports on the company.

Be Careful, Not Afraid

Compliance with applicable legal standards should always be the guiding principle of Web site content, but bear in mind that the content of the Web site provides a company with the opportunity to demonstrate good corporate governance and potentially increase its corporate governance rating issued by the numerous corporate governance rating services. In addition to items required to be posted by the SEC and the rules of your company's applicable listing exchange, consider posting additional materials on your corporate governance web page, such as: a list of directors, including their biographies and photographs; a list of board committees, including names of members and brief descriptions of committee purposes; copies of the charter for each board committee; copies of articles of incorporation and bylaws; a description of how investors can contact the board of directors; and any other policies the company wishes to make public (eg, information that may positively affect your corporate governance ratings).

As the Internet and technology continue to evolve, the body of securities laws that are applicable to Web site content and disclosures undoubtedly will evolve as well. Technology provides investors with unparalleled access to potentially useful information. Companies should be mindful of the opportunities that accompany that access, as well as the corresponding liabilities if appropriate care is not taken when availing oneself of that opportunity.