Technology companies were among the first to identify the potential of the World Wide Web to communicate information regarding products and services, partners and prospects. In today's environment it is virtually required for technology companies to maintain a presence on the Web.
An Internet website also provides an opportunity for companies to communicate with the investment community. It is common for public companies to post on their website copies of their reports to stockholders and press releases and provide links to their Securities and Exchange Commission (SEC) filings. Indeed, some provide complete "road show" presentations which can be downloaded for viewing by shareholders and potential investors.
In designing a website, both public and private companies should recognize that communications through the Internet are subject to the same securities laws as other types of communications. However, the Internet poses a number of additional concerns.
Do Not Overstate Company Development. Websites are usually designed to market the company and its products or services. While it is bad business to promise what cannot be delivered, regardless of the impact of the securities laws, some cannot resist the temptation to promote the company based on optimistic assumptions regarding future developments. Even where a website is fair when designed, it may become misleading later.
Securities laws impose liability when investors trade in a company's securities based upon false and misleading information released by the company. The SEC maintains that websites on the Internet must not misstate a fact that an investor might consider material in making an investment decision, nor may the website be misleading by failing to disclose a material fact. Even if a company does not design its website for investor relations purposes, it should know that shareholders and prospective purchasers may visit the website.
One problem is when press releases are posted on the website. In general, press releases must not be false or misleading when issued. However, there is no general duty to update one through subsequent releases unless the original was false when issued. An exception to this general rule is where the release is issued with the expectation that it will have a continuing effect. Press releases which are posted on a website may fall within this exception because each time the site is hit, the company is, in a sense, reissuing the release. Accordingly, it is important that stale releases be removed from a website and the site be frequently reviewed for accuracy.
Care should also be given when making hypertext links to websites maintained by others. When a company links its site to another site, it can be argued that it is approving the information on the other site. Of particular concern is a link to an analyst's report because through such a link, it may be ratifying the analyst's projections.
Websites During Private and Public Offerings. Both private and public technology companies need to be aware of special considerations when engaged in a securities offering.
Technology companies frequently raise capital through private securities placements. These placements are exempt from the federal and state securities laws. One federal regulation prohibits the use of "general solicitation" in connection with a private placement. A website could constitute general solicitation if it is designed or used to generate investor leads. Because of the importance of the exemption to the private offering, companies should discuss this issue with their lawyer when engaged in a private placement.
A related issue is "gun jumping" in public offerings. Under federal law, a company "in registration" may not make offers to sell securities until a registration statement is filed with the SEC; and until the registration is declared effective, and for a period thereafter, communications with investors are severely limited.
A company is "in registration" once it decides to proceed with an offering and has discussed it with potential underwriters. A website could be subject to SEC rules because "offer" is defined so broadly that any communication likely to induce an investment decision may be an offer.
The SEC provides a safe harbor from the "gun jumping" restrictions for ordinary course communications if they do not make projections of sales or revenues. This safe harbor will protect websites in existence prior to commencement of the offering, but may not protect new sites. During registration, companies should frequently review their sites to ensure legal compliance. The website's reference to the offering, after filing the registration statement, must be limited to the following:
- Issuer's name;
- Title, amount, and basic terms of securities to be offered;
- Amount of the offering to be made by present security holders (rather than by the issuer);
- Anticipated time of the offering;
- A brief statement of the manner and purpose of the offering without naming underwriters;
- Statement or legend required by any state or foreign law or an administrative authority.
Hyperlinks during registration raise additional issues. A company has strict liability for false and misleading statements made in a prospectus. Posting a prospectus on a website with links to other pages raises the possibility that the company may also be strictly liable for the linked information. Companies should therefore isolate the prospectus from other information on the website.
SEC rules also affect the website in the period following the offering. The SEC mandates that issues and underwriters limit communications during a "quiet period" following the offering. During this period, the website should make no information available about the offering or the company's prospects other than the prospectus and a tombstone advertisement.