Investor Relations on the Web

The internet offers companies a tremendous opportunity to communicate with their shareholders and prospective investors, and its combination of lightning speed and broad accessibility have affected investor relations in ways unimagined a few years ago. Even though it is the web masters, the information technology departments, or even the marketing departments, who frequently control company websites, corporate counsel at public companies have an important role in monitoring them to mitigate the threat of securities and other liabilities. This article offers guidance concerning the opportunities and risks a public company's website poses for investor relations, taking into consideration the Securities and Exchange Commission's (SEC's) recent guidance on the use of electronic media (new SEC internet release).¹

Controlling the Content of Your Site

Companies are responsible for the accuracy of their statements if they "reasonably can be expected to reach investors or the securities markets regardless of the medium through which the statements are made, including the internet."² Accordingly, all aspects of the company's website must be carefully reviewed. For example, an overly rosy presentation concerning a new product could expose the company to suit by a disgruntled investor.³

While company counsel must consider the entire website from the standpoint of securities law disclosure, companies nevertheless should maintain a separate investor relations section. This focuses communications for the relevant audience and at the same time creates a context that reduces the risk that investors will rely on communications that were not prepared with them in mind. A 1998 survey of members of the National Investor Relations Institute (NIRI) revealed that 86 percent of the public companies surveyed had such a separate section on their website.⁴

The company should establish procedures and guidelines with respect to the information posted in the investor relations section. For example, automatic posting of specified material might be permitted if counsel has already cleared it (such as press releases and SEC filings). Counsel should review and clear other material, however, such as transcripts of conference calls, before it is posted. The process of establishing legal review procedures has the added benefit of sensitizing the company's web masters to legal concerns.

It is not enough, however, to establish an investor relations section and an archival policy. Someone from the legal department should periodically review the entire website to ensure that the company's policies are being followed and that other material on the website does not give rise to liability concerns. This is especially true before a securities offering. Additionally, the company should maintain records of the website that reflect how it was updated and modified, so what was or was not posted on the site at a given time can always be demonstrated.

Avoid the Duty to Update

Serious consideration should be given to establishing an archival section and archival policy. On the web, information may be deemed continually "republished" each time an investor accesses it. Press releases should be clearly dated and should include a disclaimer to avoid implying that any specific information on the website will be updated.⁵ For example, avoid phrases such as "updated 2/1/00," "last updated 2/1/00," or "current SEC filing." It is far better to use a phrase such as "last posting 2/1/00" or to include no date other than the listing date. A disclaimer such as the following may also provide some protection:

Postings are made at such times as the company determines in its discretion. Readers should not assume that the information contained on this site has been updated or otherwise contains current information. The company does not review past postings to determine whether they remain accurate, and information contained in such postings may have been superseded.

Important disclosures that are posted on the site, such as press releases, should be dated and, when no longer current, removed or archived. To eliminate any perception that the information continues to be current, it should be moved to an archived section on a regular periodic basis.

Use Disclaimers

As discussed above, disclaimers can be particularly useful in addressing concerns related to updating information and linking to third-party websites. Nevertheless, companies should not rely entirely on disclaimers. In a footnote in its new internet release, the SEC cautions: "We do not view a disclaimer alone as sufficient to insulate an issuer from responsibility for information that it makes available to investors whether through a hyperlink or otherwise."⁶ Thus, it is important to consider all of the issues discussed below concerning the use of hyperlinks.

The most effective disclaimers are concise and clearly drafted. Some companies provide a hyperlink to disclaimers, typically at the bottom of their web page. For greater protection, in certain instances, companies should reverse this and link the disclaimer screen to the information. To best rebut the assertion that a claimant did not receive fair notice of the disclaimer, a disclaimer should appear on the screen where the information in question appears, or it should be presented as a "click through" that the visitor must acknowledge before being allowed to access the information.

Disclaimers are especially important in the case of forward-looking information. Under the Securities Litigation Reform Act of 1995's safe harbor, a written forward-looking statement must be "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement."⁷ Oral statements, on the other hand, may refer to the document in which the information appears. These provisions must be considered in the context of a company website. It is clear, for example, that forward-looking information should be "accompanied by" risk disclosure, but where should it appear? Some companies place it on the same page with the information. Others place the disclaimer on the first page of their investor relations section and link it to legal information or a click-through screen that forces users to acknowledge it. All of these steps provide some protection, but it is not clear that a court will find that a link satisfies the "accompanied by" standard. Another suggestion is to post a four- or five-line risk disclosure footer so that the message is always accompanied by the risk disclosure. This would be consistent with the SEC's statement in its release addressing offshore internet matters: "if the disclaimer is not on the same screen as the offering material, or is not on a screen that must be viewed before a person can view the offering materials, it would not be meaningful."⁸ Companies might also consider linking the cautionary statement to any discussion of risk factors that appears in its periodic reports. More companies are including risk factors in their Form 10-K and 10-Q filings.⁹

Companies should use particular care when putting oral statements, such as transcripts of analyst's calls or conferences, on their website. If these oral presentations are put on a website as text, they become "writing" and are subject to the requirement of the Litigation Reform Act that they be "accompanied by meaningful cautionary statements." Accordingly, the safe harbor language will have to be revised before the information is put on the company website.

Use Hyperlinks with Caution

One of the advantages of the internet is the ability to link to information from other sources. Companies are taking advantage of this opportunity to link to numerous third-party sources for information such as stock prices, continuous earning estimates, and EDGAR filings. Hyperlinking, however, gives rise to liability concerns, particularly in the securities law arena. A company may be viewed as implicitly adopting or endorsing the information on the linked site. Moreover, it is unlikely that information emanating from a source outside a company will contain the cautionary statements required by the Private Securities Litigation Reform Act of 1995 (Litigation Reform Act) to provide a safe harbor from liability under the securities laws.

The new SEC internet release includes a detailed discussion of company responsibility for hyperlinked information, but indicates that there is not a "'bright line' mechanical test."¹⁰ Nevertheless, it sets forth three factors the SEC believes relevant in deciding whether a company has adopted information on a third-party website to which it has established a link.

The first factor is the context of the hyperlink-what has the company said about the hyperlink and what does the context imply? For example, if a company writes that the hyperlinked information contains the best description of the company, or otherwise supports a particular assertion, the company is likely to be viewed as explicitly endorsing the information.

The second factor in determining company responsibility for hyperlinked information is whether the investor is likely to be confused about the source of the information. Specifically, the new SEC internet release indicates that hyperlinked information on a third-party website may be less likely to be attributed to the company if, before being linked to the third-party website, a user must click through a screen announcing that he or she is leaving the company's website. Such exit notices generally also indicate that the user is leaving the company's website and that the company does not monitor or endorse the information on the third-party site. The SEC warns that, while a disclaimer such as this may decrease potential investor confusion, it will not insulate a company from liability when the relevant facts and circumstances indicate that the company has adopted the information.¹¹

The SEC release also notes that the risk of investor confusion is heightened when a company "frames" or "inlines" a third-party website such that the information looks like it is on the company's website. Thus, an attractive web design technique may increase the possibility that the company could be found liable for the information.

The third factor the SEC release identifies is the presentation of the hyperlinked information. The release indicates that in the following situations the hyperlinked information is more likely to be attributable to the company:

• a wealth of information as to a particular matter is available and the information accessed by the hyperlink is not representative of the available information a company establishes and terminates hyperlinks to third-party websites depending upon the nature of the information; or
  
• the method of presenting the hyperlink influences disproportionately an investor's decision to view the third-party information" (for example, relative size or color).

Links to analysts' reports are particularly sensitive, since under the adoption theory, a company may be held liable for adopting statements made in an analyst's report. This theory was endorsed in the Presstek case, in which the SEC found an issuer responsible for the information in an analyst's report it distributed.¹² Accordingly, counsel generally advise companies not to link to analysts' reports.

Companies that choose to list on their websites the names, firms, addresses, and telephone numbers of analysts who cover the company should be careful to include all analysts who cover the company. They should also include a statement that the company's publication of the list does not indicate endorsement or approval of any of the analysts' evaluations, ratings, reports, or projections. Recently, a number of companies have started to provide links to the First Call consensus earning estimates. In such cases, an exit notice and disclaimer is particularly important, and a company should understand that it is putting itself in a difficult situation if it becomes aware that the posted consensus is inaccurate.

On the other hand, certain third-party sites are not likely to raise liability concerns. For example, links to the SEC's EDGAR system for company filings, to a commercial EDGAR site, or to a provider of current stock prices is relatively harmless, but exit notices are still desirable. Additionally, any limitations that could be material to an investor, such as a 20-minute delay in stock price information, should be prominently noted.

Special Considerations Before and During Securities Offerings

In the period before and during a securities offering, it is important to consider how [s]ection 5 of the Securities Act of 1933 applies to company internet communications.¹³ Such communications may constitute illegal offers under the Securities Act. Moreover, if a company has established a hyperlink to information on a third-party website, and if that information meets the definition of an "offer to sell" under section 2(a)(3) of the Securities Act, it "raises a strong inference that the hyperlinked information is attributable to the issuer for purposes of a [s]ection 5 analysis."¹⁴ Thus, the SEC urges "an issuer in registration [to]…carefully review its website and any third-party websites to which it hyperlinks."¹⁵

While a company certainly does not have to close its website prior to a securities offering, that is not a good time to launch a new website or substantially enhance an existing one. In its most recent internet release, as well as in a series of old releases¹⁶ that remain good law, the SEC has made it clear that companies can continue their normal advertising and communications activities; this applies to a company website as well.

The new SEC internet release lists the following as "ordinary-course business and financial information" that may continue to be posted on a website during an offering: advertisements concerning the issuer's products and services;

• Exchange Act reports required to be filed with the SEC;
  
• proxy statements, annual reports to security holders, and dividend notices;
  
• press announcements concerning business and financial developments;
  
• answers to unsolicited telephone inquiries concerning business matters from securities analysts, financial analysts, security holders, and participants in the communications field who have a legitimate interest in the issuer's affairs; and
  
• security holders' meetings and responses to security holders' inquiries relating to these matters.¹⁷

On the other hand, unusual promotional activities can give rise to concern.

Additional considerations apply in the case of nonreporting companies. As the new SEC internet release states:

A nonreporting issuer preparing for its first registered public offering that contemporaneously establishes a website…may need to apply this guidance more strictly when evaluating its web content because it may not have established a history of ordinary course business communications with the marketplace.¹⁸

As part of the review process, the SEC staff routinely reviews company websites. An issuer can also get into trouble when it includes information on its website but not in its prospectus or other filings. To illustrate, as a result of an SEC staff comment, AgriBiotech Tech, Inc. added a section to its prospectus in August 1998, entitled "Website Disclosures" to publish information discussed on the company's website but not otherwise included in filed documents.

Avoid Offering Stock

While the investor relations section may present an excellent opportunity for the company to tell prospective investors about itself, the wording should not appear to be a general solicitation of the company's securities. If it is, the company could be disqualified from a private placement of its securities under section 4(2) of the Securities Act, since one of the rationales underlying the private placement exemption is the absence of general solicitation or advertising.¹⁹ This issue is discussed in the new internet release, but is beyond the scope of this article.²⁰

On the other hand, companies are using their websites to publicize their dividend reinvestment plans and direct purchase plans, but they must do so with care. These plans allow investors to purchase stock directly from the issuer. Companies that promote their stock plans on their websites, or that link to their plan administrator's website, must observe the SEC's specific restrictions.

The SEC's guidance to companies seeking to notify website visitors of these plans essentially requires a certain degree of effort by the visitor to seek out the plan information and imposes greater restrictions on some types of plans than on others. The SEC's May 15, 1996, interpretive release on electronic media states that an issuer's website may refer to its dividend reinvestment plan and give the independent administrator's phone number and address to obtain additional information, or hyperlink to the administrator's website, but it may not link directly to the plan materials. A subsequent no-action letter to the Securities Transfer Association²¹ authorized a series of hyperlinks that take visitors directly into bank-sponsored direct purchase plan materials and enrollment forms, so long as investors had to enter a certain number of clicks to get to them.²²

Another category of stock plans-employee stock plans, such as stock option plans and stock purchase plans-is a natural candidate for the web, as former SEC Commissioner Steven Wallman observed in a 1997 interview.²³ Employees who want to participate can access these plans at work through the internet and, increasingly, their company's intranet. ChaseMellon, as an administrator of stock plans, has technology that allows employees, sitting at their desks, to get current account information, perform "what if" modeling scenarios, and even exercise their options. Thus, the internet's ability to offer direct service can benefit not just investors and the company's investor relations department, but also the human resources department by reducing administrative costs relating to employee shareholders.

Beware of Chat Rooms and Message Boards

As investors increasingly use the internet as a primary source for information about companies, it has become an extremely efficient means for people to victimize others.²⁴ "Pump and dump" schemes are not new, but with a personal computer and an internet connection, almost anyone can commit securities fraud. Even for people without criminal intent, online shareholder revolts, chat-room scuttlebutt, and message-board whispering campaigns can threaten a public company's share price. Many message boards focus on investment-related topics. These message boards are typically organized according to company. Two well-known examples are Motley Fool and Yahoo! Finance. Companies need to consider whether to monitor chat rooms and message boards for what is being said about them, whether to respond to rumors and false statements, and whether to try to identify and prosecute people who anonymously post false or confidential information about them.²⁵

Some companies have taken steps to detect "cyber-smears" and other internet-related events early, in an attempt to mitigate whatever effect they may have on their stock. Companies can assign employees to monitor chat rooms and message boards, or they can retain a public relations firm to do so. More efficient is automated web surveillance software that does this. Such software scours the internet for references to the company and can email reports to the company's investor relations personnel on what is being said about the company, as well as competitors the company chooses to monitor.

Once a company has located online rumors or negative postings, it should generally resist the urge to respond because responding might create an expectation that the company will continue to monitor and correct inaccurate third-party postings, or raise selective disclosure problems. Most issuers using ChaseMellon's web-surveillance product reported that they have a policy not to respond to rumors or false statements on the internet. These policies are not absolute, however. As with noninternet marketplace rumors, under some circumstances-for example, when the rumors result in unusual trading activity-there may actually be a duty to respond. The listing or trading standards of the New York Stock Exchange (NYSE) and NASDAQ may require companies to respond to internet rumors. For example, NYSE's Listed Company Manual states:

If rumors or unusual market activity indicates that information on impending developments has leaked out, a frank and explicit announcement is clearly required. If rumors are in fact false or inaccurate, they should be promptly denied or clarified.

Here, the considerations are similar to those involving market rumors in general-internet or otherwise-and public companies should have securities counsel help them create, distribute, and implement a corporate policy to deal with rumors of any sort. As with noninternet rumors, management must evaluate whether its duty to shareholders requires the company to reply, to institute an investigation into the subject of the posting, or to respond in some other way.

Although turning the other cheek is usually the right response, depending on the circumstances, a company that is the victim of cyber-smear may choose to fight back. It can, for instance, issue cease-and-desist letters to operators of the internet message boards or chat rooms demanding that offending postings be removed or even blocked. In other circumstances, the company may contact the SEC or other law enforcement authorities or sue the person who posted the offending messages for libel. If the postings were made anonymously, the company can institute a "John Doe" litigation and use the court's subpoena powers to identify the defendants so that claims may be prosecuted against them. Other companies have retained specialized private investigators to discover the identity of people who post information on the internet. These sleuths use data-mining techniques, including finding older postings on other sites, to identify the person in question. They can also attempt to lure the person to a site that allows his or her identity to be traced. Be aware that such responsive actions may be used against the victim. For example, the recipient of a cease-and-desist letter may post it on the internet.

Companies should establish written policies prohibiting employees from discussing corporate matters in chat rooms or message boards, since anything said by someone identified with the company may be viewed as a disclosure by the company.²⁶ Many companies are adding these prohibitions, as well as ones addressing email, to the code of conduct they distribute to all employees. Such policies can guard against the risks that arise when even a well-intentioned employee tries to correct rumors or defend the company. Additionally, employees should be periodically reminded about their duty not to disclose confidential information.

Recognize the Limitations of Electronic Communications

The tremendous growth of the internet and its integration into our business and professional lives may lead to the assumption that disclosure of information via a company website is public dissemination. Securities regulators, however, have not yet accepted that view. The SEC's concern is that the information may be posted, but no one, or a select few, may be aware of it.²⁷ The NASD, too, changed its rules prohibiting its companies from disseminating information over the internet before the news media receive it.²⁸ The NYSE takes a similar view.²⁹ Accordingly, companies should issue a press release either prior to or simultaneously with posting information on their website.

Although beyond the scope of this article, counsel advising public companies should bear in mind that companies wishing to disseminate required disclosure documents electronically, thereby avoiding the cost of also providing paper copies, must obtain shareholders' consent. The SEC's guidance in this area is aimed at preventing shareholders with technical limitations from being disenfranchised. The new SEC internet release expands on guidance given in October 1995 and May 1996 by emphasizing this.

Taking Advantage of the Company Website

With all these caveats and precautions, a company should not lose sight of the tremendous opportunities the internet offers for investor communications. Companies are posting their earnings releases, quarterly reports and SEC filings, management speeches and presentations, and transcripts of analysts' conference calls. With the development of broadcast technology, some companies are offering simultaneous "web-casts" of their analysts' presentations, conference calls, and even their annual meetings.³⁰

Companies are also using the internet and their intranets to disseminate required disclosure documents, such as annual reports and proxy statements, to shareholders. Where state law permits (as it generally does), they can also offer shareholders the option to record their proxy votes online. Since not all shareholders have access to the internet, or choose to receive information online, merely posting information on the internet as an alternative to mailing printed documents is not permitted unless the shareholder has consented to receiving information this way. The SEC, however, does distinguish between employee shareholders and other shareholders for purposes of electronic dissemination of information. It presumes that employees who have access to email will receive electronic delivery, thereby making it much easier to communicate with employee shareholders electronically.³¹ The new SEC internet release states clearly that this position is limited to employees.³²

One area in which few companies are taking full advantage of their websites is corporate governance guidelines. In response to the need to develop best practices, and pressure from institutional investors, many companies have created such guidelines. They generally address matters such as board and committee composition and structure, term limits, and retirement age. Having gone through the process of establishing such guidelines, many companies are forfeiting an investor relations opportunity if they do not post their guidelines on their website. Intel is an example of a company that has done this. Corporate governance is just one area in which corporate counsel can take an active rol in facilitating investor commuiations on the Web.

Conclusion

Corporate counsel should keep up with the evolving standards that affect securities liability and the opportunities to use their website to better serve the company's investor relations function. Counsel should also bear in mind that a company's website is a window into the whole organization and thus should ensure that a team charged with the creation and maintenance of the website is in place. This team should include, in addition to the technical players, senior representatives of the legal department and investor relations department, as well as marketing and the relevant businesses. There should be clear lines of responsibility and frequent review and updates. It is easy to keep abreast of best practices in website investor relations and to see how other in-house counsel have handled the legal issues-just go online and look at companies like American Express and Microsoft.

Despite the enormous growth in the internet and its applications to investor relations in recent years, common sense is still the best guide. For example, while the explosion of available information has highlighted the importance of disclaimers, the utility of disclaimers hinges on whether they are fair and reasonable in the context, just as it does outside the internet. Similarly, in the case of hyperlinks, people are generally held accountable for what they control, but can take reasonable steps to avoid responsibility for what they cannot control. Market rumors, although accelerated enormously by the internet, are best responded to-or not-according to traditional principles. Counsel should therefore recognize the dramatic ways that the internet has changed dissemination of information, but that the internet has not changed the basic considerations of fair disclosure.

1. SEC Release No. 33-7856, Use of Electronic Media (April 28, 2000).

2. Id. at n. 49.

3. In In re Carter-Wallace Sec. Litig., 150 F3d 153 (2nd Cir. 1988), the Second Circuit held that a company was liable, under Rule 10b-5 of the Securities Exchange Act of 1934, for a misleading advertisement in a medical journal because analysts had access to it.

4. NIRI, A STUDY OF CORPORATE DISCLOSURE PRACTICES (May 1998).

5. In the new SEC internet release, the SEC solicits comments on "how to facilitate the availability of historical information on the internet consistent with the federal securities laws." Release No. 33-7856, at n. 113.

6. New SEC internet release, release No. 33-7856 at n. 61.

7. Section 21E of the Securities Exchange Act of 1934.

8. Release No. 33-7516 (March 23, 1998).

9. The SEC's aircraft carrier release would require risk factor disclosure in such filings. Release No. 33-7606A (November 13, 1998).

10. Release No. 33-7856, text following n. 55.

11. Id. at n. 61.

12. In the Matter of Presstek, Inc., 1997 SEC LEXIS 2645 (December 22, 1997).

13. See new SEC internet release No. 33-7856, text at nn. 62-68.

14. Id. at n. 66.

15. Id.

16. Release Nos. 33-5009 (Oct. 7, 1969) and 33-5180 (Aug. 20, 1971).

17. Id. at n. 67.

18. Id.

19. SEC Release No. 33-7233 (October 6, 1995).

20. See Release No. 33-7856 at text accompanying nn. 79-95.

21. October 24, 1997.

22. There are two types of direct purchase plans: "issuer-sponsored" plans, under an SEC exemptive order dated December 1, 1994, in which new shares can be issued, and "bank-sponsored" plans, under an SEC no-action letter issued to the Securities Transfer Association dated September 14, 1995, in which only open market shares can be purchased. The relief in this no-action letter would presumably also apply to dividend reinvestment plans involving only open-market shares.

23. Q&A with SEC Commissioner Steven M.H. Wallman, Offline, BULLETIN BOARD, INC. 3(1)(1997).

24. The new SEC internet release states that the SEC has brought approximately 120 internet-related enforcement actions through March of this year. Release 33-7856 at n.4.

25. Section 202.03.

26. For discussion of such policies and a sample policy, see, Louis M. Thompson, Jr. and Maryann Waryjas, A Suggested Electronic and Telephonic Communications Systems Policy, INSIGHTS, January 2000, p. 21. See also, Broc Romanek, Understanding the 'Undernet': Message Board Can Be Tricky for Employees, INSIGHTS, May 2000, at 12.

27. Under SEC proposed Regulation FD dealing with selective disclosure, a website posting by itself is not considered to be a sufficient means of public disclosure. See Release No. 33-7787 (December 20, 1999) at n. 15.

28. NASD Interpretation IM-4120-1. See also SEC Release No. 34-4-0988 (January 28, 1999) approving the interpretation.

29. NYSE LISTING COMPANY MANUAL, Section 202-06(A).

30. See, NIRI Executive Alert (February 29, 2000) reporting results of survey indicating that 48 percent of companies conducting conference calls are web-casting them over the internet.

The SEC's 1995 and 1996 releases, as well as new SEC internet release, discusses the commission's views on the use of electronic media to deliver information to investors, which is beyond the scope of the article. See, Release n. 33-7233 (Oct. 6, 1995), 33-7288 (May 9, 1996) and Release No. 33-7856 (April 28, 2000).

31. Release No. 33-7288 (May 1996). See, also, Broc Romanek, Employees as Shareholders in the Cyber Age, INSIGHTS (May 15, 1999) at 15.

32. Release No. 33-7856 at n. 106.