Most public companies now use their web site as an efficient, inexpensive way to distribute information to investors, customers, the media, and the public at large. But the unique communications culture of the web also makes it a growing source of liability under securities laws.
The Securities Exchange Commission (SEC) has specifically noted that the .liability provisions of the federal securities laws apply equally to electronic and paper-based media,. and plaintiffs in securities lawsuits have cited company web pages in their complaints. Unfortunately, many companies that are careful to use review procedures and disclaimers to ensure the accuracy of their formal paper disclosures are less rigorous when it comes to disclosures made via their web site.
Given the vast amount of information posted on most web sites and the wide audience to whom that information is available, companies should exercise great care in deciding when, how and what information should be placed on their web sites.
Forward-Looking Information
Company web sites often display company press releases, investor presentations and speeches by officers that contain forward-looking statements about the company or its predicted performance. But those items are not always accompanied by the meaningful cautionary language and disclaimers that protect forward-looking statements from liability under securities laws.
Companies that wish to protect their web disclosures from liability under the securities laws should have formal clearance procedures in place, as well as personnel (either counsel or management familiar with legal disclosure requirements) assigned to review and approve all materials before they are posted on the web site.
If in doubt about whether a web posting contains a forward-looking statement, the company should err on the side of discretion by including the appropriate cautionary risk disclosures. Company information on the web should also be periodically updated to prevent it from becoming outdated. At a minimum, information that is time-sensitive should be clearly marked with a posting date and should include a notice that the information is accurate only as of its particular date and the company disclaims a duty to update.
Links to Analyst Reports
Many companies post analyst reports on their web site or make such reports available via hyperlinks. But companies that do so run the risk that a court may view the analysts. reports as sufficiently entangled with the company.s own web site to be treated as if they were issued directly by the company.
Even if a company only refers to an analyst or analyst report on its web page, it is prudent to include a disclaimer that the company does not endorse the analysts. information or views. The same practice should be used when a web site refers or hyperlinks to other types of third-party information.
Prospectuses
Some companies post preliminary prospectuses on their web sites when they plan to issue securities. However, there are restrictions on what kind of information a company can disseminate during the period when a preliminary prospectus is in effect. The SEC.s rules provide that until the prospectus becomes effective, an offer of securities must be made only by use of a preliminary prospectus, which generally precludes companies from including marketing materials along with a preliminary prospectus.
The SEC has not yet provided clear guidance on whether posting a prospectus on a web site causes other information on the site to be viewed as part of a company.s selling effort. On the one hand, the SEC has indicated that listing a web site address in a preliminary prospectus alone does not automatically incorporate by reference the entire contents of the web site, and in response to the practice of creating a separate web site for a preliminary prospectus, the SEC clarified that .the Commission does not require that a prospectus be the only information on a web site..
On the other hand, however, the SEC has stated that it views hyperlinking multiple documents or providing access to them from the same menu as the equivalent of mailing the documents in the same envelope. Consequently, many issuers have taken the cautious route of not posting their preliminary prospectuses on their web site at all.
Responding To Message Boards And Chat Rooms
Unfortunately, a company.s efforts to ensure the accuracy of information available through its own web site may not be enough to prevent false information about the company from reaching investors via the Internet. Thousands of users each day use online message boards and chat rooms to comment on companies. performance and to recommend the purchase or sale of a particular stock. More and more frequently, these message boards and chat rooms are being used to spread misinformation about a company to manipulate its stock price for personal gain.
A stock owner may try to drive up a stock.s price with unfounded message board or chat room promotions before selling his or her shares for a profit (.pump and dump.) or falsely disparage a company to artificially drive down the price before purchasing shares (.cyber-smearing.). Small companies that are not widely covered by analysts are most susceptible to such manipulation since investors have few ways to check claims made over the Internet.
The SEC has stepped up its investigation and prosecution of such activity in the past year through several Internet .sweeps. conducted by its rapidly expanding Internet surveillance unit, Cyberforce. The sweeps involve concentrated investigations coupled with clusters of high profile enforcement actions alleging use of the Internet in violation of the securities laws. To effect enforcement, the SEC has to tie the fraudulent postings to an e-mail address and match the postings with sales activity.
It has become common for companies to retain online monitoring services that troll the web for false or misleading rumors using automated .spiders. which search message boards and chat rooms for key-word phrases. Although a company has no duty to correct third-party misinformation on message boards or in chat rooms, a company that believes its stock price is being manipulated via the Internet has a couple of options for trying to prevent the spread of misinformation. One option is to take legal action aimed at identifying and recovering against offending Internet users. Since most Internet posting is done anonymously, companies who have discovered offending information on a message board have had to file suit using Internet pseudonyms or .John Doe. defendants. The cases are typically brought in a court that has jurisdiction over the message board or chat room.s Internet Service Provider (such as Yahoo, Lycos, etc.). In response to subpoenas, those ISP.s promptly turn over records that help determine the true identities of the John Does, who are then named as defendants. Although such litigation can be costly, in some cases, the mere filing of the suit has stemmed the flow of message board rumors.
Other companies have chosen to post corrective messages on message boards or to issue a corrective press release to try to dispel rumors being circulated about the company. Although such corrective postings or releases have sometimes proven effective, they are extremely risky and should be undertaken with the utmost of care. A company may deny a rumor only to find out later that the rumor was based in fact. The denial may then subject the company to liability for securities fraud. The most prudent practice is to have a company policy that strictly prohibits posting information about the company over the Internet. Since many of the Internet stock manipulators have turned out to be company employees, such a company policy should have a significant deterrent effect.