[Federal Register Volume 65, Number 87 (Thursday, May 4, 2000)]
[Rules and Regulations]
[Pages 25843-25857]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11079]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 231, 241 and 271

[Release Nos. 33-7856, 34-42728, IC-24426; File No. S7-11-00]
RIN 3235-AG84


Use of Electronic Media

AGENCY: Securities and Exchange Commission.

[[Page 25844]]


ACTION: Interpretation; Solicitation of Comment.

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SUMMARY: We are publishing guidance on the use of electronic media by 
issuers of all types, including operating companies, investment 
companies and municipal securities issuers, as well as market 
intermediaries. The guidance addresses the use of electronic media in 
three areas. First, we update our previous guidance on the use of 
electronic media to deliver documents under the federal securities 
laws. Second, we discuss an issuer's liability for web site content. 
Third, we outline basic legal principles that issuers and market 
intermediaries should consider in conducting online offerings. 
Additionally, because technology is evolving rapidly, we seek comment 
on a number of issues to assist us in determining whether further 
regulatory action is necessary.

DATES: Effective Date: The interpretations are effective on May 4, 
2000. Comment Date: Comments should be submitted on or before June 19, 
2000.

ADDRESSES: You should submit three copies of your comments to Jonathan 
G. Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549-0609. You also may submit your 
comments electronically to the following electronic mail address: [email protected]. All comment letters should refer to File Number S7-
11-00; please include this file number in the subject line if you use 
electronic mail. Comment letters will be available for inspection and 
copying at the Commission's Public Reference Room, 450 Fifth Street, 
N.W., Washington, D.C. 20549. We will post electronically submitted 
comment letters on our Internet web site http://www.sec.gov>.\1\
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    \1\ We do not edit personal, identifying information, such as 
names or electronic mail addresses, from electronic submissions. 
Submit only information you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: P.J. Himelfarb and Mark A. Borges in 
the Office of Chief Counsel, Division of Corporation Finance, at (202) 
942-2900. For questions regarding broker-dealers (including municipal 
securities dealers), please contact Paula R. Jenson, Deputy Chief 
Counsel, and Laura S. Pruitt in the Office of Chief Counsel, Division 
of Market Regulation, at (202) 942-0073. For questions regarding 
broker-dealer capacity, please contact Irene A. Halpin and Joan M. 
Collopy in the Office of Risk Management and Control, Division of 
Market Regulation, at (202) 942-0772. For questions regarding 
investment companies and investment advisers, please contact Alison M. 
Fuller, Assistant Chief Counsel, and David W. Grim in the Office of 
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Chief Counsel, Division of Investment Management, at (202) 942-0659.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Interpretive Guidance
A. Electronic Delivery
    1. Telephonic Consent
    2. Global Consent
    3. Use of Portable Document Format
    4. Clarification of the ``Envelope Theory''
B. Web Site Content
    1. Issuer Responsibility for Hyperlinked Information
    a. Context of the Hyperlink
    b. Risk of Confusion
    c. Presentation of the Hyperlinked Information
    2. Issuer Communications During a Registered Offering
C. Online Offerings
    1. Online Public Offerings
    2. Online Private Offerings under Regulation D
    3. Broker-Dealer Capacity
D. Technology Concepts
    1. Access Equals Delivery
    2. Electronic Notice
    3. Implied Consent
    4. Electronic-Only Offerings
    5. Access to Historical Information
    6. Communications When in Registration
    7. Internet Discussion Forums
E. Examples
III. Solicitation of Comment

I. Introduction

    By facilitating rapid and widespread information dissemination, the 
Internet has had a significant impact on capital-raising techniques 
and, more broadly, on the structure of the securities industry. Today, 
almost seven million people invest in the U.S. securities markets 
through online brokerage accounts.\2\ To serve this increasing interest 
in online trading, there has been a surge in online brokerage firms 
offering an array of financial services.\3\ Additionally, many publicly 
traded companies are incorporating Internet-based technology into their 
routine business operations, including setting up their own web sites 
to furnish company and industry information. Some provide information 
about their securities and the markets in which their securities trade. 
Investment companies use the Internet to provide investors with fund-
related information, as well as shareholder services and educational 
materials. Issuers of municipal securities also are beginning to use 
the Internet to provide information about themselves and their 
outstanding bonds, as well as new offerings of their securities. The 
increased availability of information through the Internet has helped 
to promote transparency, liquidity and efficiency in our capital 
markets.
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    \2\ Katrina Brooker, They Want You Wired; Brokerage Firms of All 
Kinds are Tripping Over Themselves to Compete Online for Customers, 
Fortune, Dec. 20, 1999, at 113. See also Online Brokerage: Keeping 
Apace of Cyberspace, Report of Laura S. Unger, Commissioner, U.S. 
Securities and Exchange Commission, Nov. 1999 (the Unger Report), at 
1 (the percentage of equity trades conducted online in the first 
quarter of 1999 was 15.9% of all equity trades). The report is 
available on our Internet web site at http://www.sec.gov/news/spstindx.htm>.:
    \3\ It is estimated that over 160 brokerage firms offer their 
customers the ability to trade securities online. See the Unger 
Report, n. 2 above, at 15. :
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    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.
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    \4\ Through March of this year, we had filed approximately 120 
Internet-related enforcement actions. See Statement of Chairman 
Arthur Levitt before the Senate Subcommittee on Commerce, Justice, 
State and the Judiciary, Committee on Appropriations, re: 
Appropriations for Fiscal Year 2001, Mar. 21, 2000. The statement is 
available on our Internet web site at http://www.sec.gov/news/testmony/ts052000.htm>. We also have conducted three Internet 
enforcement sweeps. See SEC Steps Up Nationwide Crackdown Against 
Internet Fraud, Charging 26 Companies and Individuals for Bogus 
Securities Offerings, SEC Press Release 99-49 (May 12, 1999); SEC 
Continues Internet Fraud Crackdown, SEC Press Release 99-24 (Feb. 
25, 1999); Purveyors of Fraudulent Spam, Online Newsletters, Message 
Board Postings, and Websites, SEC Press Release 98-117 (Oct. 28, 
1998). These press releases are available on our Internet web site 
at http://www.sec.gov/news/presindx.htm>.
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    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

[[Page 25845]]

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\
    Today's interpretive guidance will do the following:
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    \5\ See Securities Act Release No. 7760 (Oct. 22, 1999) [64 FR 
61408]. This new regulatory system relaxes restrictions on 
communications in cash tender offers, mergers, exchange offers and 
proxy solicitations.
    \6\ We also are considering separately the use of road shows in 
the capital-raising context.
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     Facilitate electronic delivery of communications by 
clarifying that

--investors may consent to electronic delivery telephonically;
--intermediaries may request consent to electronic delivery on a 
``global,'' multiple-issuer basis;
--issuers and intermediaries may deliver documents in portable document 
format, or PDF, with appropriate measures to assure that investors can 
easily access the documents;
--an embedded hyperlink \7\ within a Section 10 prospectus \8\ or any 
other document required to be filed or delivered under the federal 
securities laws causes the hyperlinked information to be a part of that 
document;
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    \7\ A ``hypertext link,'' or ``hyperlink,'' is an electronic 
path often displayed in the form of highlighted text, graphics or a 
button that associates an object on a web page with another web page 
address. It allows the user to connect to the desired web page 
address immediately by clicking a computer-pointing device on the 
text, graphics or button. See Harvey L. Pitt & Dixie L. Johnson, 
Avoiding Spiders on the Web: Rules of Thumb for Issuers Using Web 
Sites and E-Mail, in Practising Law Institute, Securities Law & the 
Internet, No. 1127 (1999), at 107-118, n. 5.
    \8\ In this release, when we refer to a Section 10 prospectus, 
we are referring both to prospectuses satisfying the requirements of 
Section 10(a) of the Securities Act, 15 U.S.C. 77j(a), and 
prospectuses satisfying the requirements of Section 10(b) of the 
Securities Act, 15 U.S.C. 77j(b).
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--the close proximity of information on a web site to a Section 10 
prospectus does not, by itself, make that information an ``offer to 
sell,'' ``offer for sale'' or ``offer'' within the meaning of Section 
2(a)(3) of the Securities Act \9\; and
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    \9\ 15 U.S.C. 77b(a)(3).
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--municipal securities underwriters may rely on a municipal securities 
issuer to identify the documents on the issuer's web site that comprise 
the preliminary, deemed final and final official statements.

     Reduce uncertainty regarding permissible web site content 
to encourage more widespread information dissemination to all investors 
by clarifying

--some of the facts and circumstances that may result in an issuer 
having adopted information on a third-party web site to which the 
issuer has established a hyperlink for purposes of the anti-fraud 
provisions of the federal securities laws; and
--general legal principles that govern permissible web site 
communications by issuers when in registration.\10\

    \10\ ``In registration'' is a term that refers to the entire 
registration process under the Securities Act, ``at least from the 
time an issuer reaches an understanding with the broker-dealer which 
is to act as managing underwriter [before] the filing of a 
registration statement'' until the end of the period during which 
dealers must deliver a prospectus. See Securities Act Release No. 
5180, at n. 1 (Aug. 16, 1971) [36 FR 16506]. An issuer will not be 
considered to be ``in registration'' at any particular point in time 
solely because it has filed one or more registration statements on 
Form S-8, 17 CFR 239.16b, or it has on file a registration statement 
for a delayed shelf offering on Form S-3, S-4, F-3 or F-4, 17 CFR 
239.13, 239.25, 239.33 or 239.34, and has not commenced or is not in 
the process of offering or selling securities ``off of the shelf.''
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     Facilitate online offerings by clarifying
--general legal principles that broker-dealers should consider when 
developing and implementing procedures for online public offerings; and
--circumstances under which a third-party service provider may 
establish a web site to facilitate online private offerings.

II. Interpretive Guidance

A. Electronic Delivery

    We first published our views on the use of electronic media to 
deliver information to investors in 1995.\11\ The 1995 Release focused 
on electronic delivery of prospectuses, annual reports to security 
holders and proxy solicitation materials under the Securities Act of 
1933,\12\ the Securities Exchange Act of 1934 \13\ and the Investment 
Company Act of 1940.\14\ Our 1996 electronic media release \15\ focused 
on electronic delivery of required information by broker-dealers 
(including municipal securities dealers) and transfer agents under the 
Exchange Act and investment advisers under the Investment Advisers Act 
of 1940.\16\
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    \11\ Securities Act Release No. 7233 (Oct. 6, 1995) [60 FR 
53458] (the 1995 Release).
    \12\ [12]: 15 U.S.C. 77a, et seq.
    \13\ 15 U.S.C. 78a, et seq.
    \14\ 15 U.S.C. 80a-1, et seq.
    \15\ Securities Act Release No. 7288 (May 9, 1996) [61 FR 24644] 
(the 1996 Release). The 1996 Release also provided additional 
examples supplementing the guidance in the 1995 Release. Since 1996, 
we have further addressed the use of electronic media in the context 
of offshore sales of securities and investment services, see 
Securities Act Release No. 7516 (Mar. 23, 1998) [63 FR 14806] (the 
1998 Release), and cross-border tender offers, see Securities Act 
Release No. 7759, Section II.G (Oct. 22, 1999) [64 FR 61382].
    \16\ 15 U.S.C. 80b-1, et seq.
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    We believe that the framework for electronic delivery established 
in these releases continues to work well in today's technological 
environment. Issuers and market intermediaries therefore must continue 
to assess their compliance with legal requirements in terms of the 
three areas identified in the releases--notice, access and evidence of 
delivery. Although we believe that this framework continues to be 
appropriate, we provide below guidance that will clarify some 
regulatory issues relating to electronic delivery.\17\
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    \17\ In Section D below, we also request comment on a number of 
additional issues involving electronic delivery.
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1. Telephonic Consent
    As noted above, one of the three elements of satisfactory 
electronic delivery is obtaining evidence of delivery. The 1995 Release 
provided that one method for satisfying the evidence-of-delivery 
element is to obtain an informed consent from an investor to receive 
information through a particular electronic medium.\18\ The 1996 
Release stated that informed consent should be made by written or 
electronic means.\19\ Some securities lawyers have concluded that, 
based on the 1996 Release, telephonic consent generally is not 
permitted. Others have opined that telephonic consent may be 
permissible if an issuer or intermediary retains a record of the 
consent.\20\
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    \18\ See the 1995 Release, n. 11 above, at n. 29 and the 
accompanying text.
    \19\ See the 1996 Release, n. 15 above, at n. 23.
    \20\ See John R. Hewitt & Richard B. Carlson, Securities 
Practice and Electronic Technology, Law Journal Seminars-Press 
(1998), at 3.01[1].
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    In today's markets, where speed is a priority, significant matters 
often are communicated telephonically. It is common (and increasingly 
popular), for instance, for security holders to vote proxies and even 
transfer assets over the telephone where permitted under applicable 
state law.\21\ In addition, investors can place orders to trade 
securities over the telephone. We believe these practices have 
developed because business can be transacted as effectively over the 
telephone today as it can in paper. We are of the view, therefore, that 
an issuer or market

[[Page 25846]]

intermediary may obtain an informed consent telephonically, as long as 
a record of that consent is retained.\22\ As with written or electronic 
consent, telephonic consent must be obtained in a manner that assures 
its authenticity.\23\
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    \21\ See Stephen I. Glover & Lanae Holbrook, Electronic Proxies, 
Nat. L. J., Mar. 29, 1999, at B5; See also Jennie Blizzard, Investor 
Relations Gets Tech Updates; Proxy Voting Among the Signs of Change, 
Rich. Times Dispatch, Mar. 28, 1999, at E1. Similarly, mutual fund 
shareholders may effect purchases and redemptions of fund shares 
telephonically, where permitted by the fund and under applicable 
state law.
    \22\ The record of telephonic consent should contain as much 
detail as any written consent, including whether the consent 
obtained is global and what electronic media will be used.
    \23\ See, for example, Ex. 1 and Ex. 2 in Section E below.
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2. Global Consent
    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.
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    \24\ See the 1995 Release, n. 11 above, at Ex. 3 (consent by 
investor John Doe to delivery of all future documents by electronic 
mail) and Ex. 26 (consent by record holder Jane Doe to delivery of 
all documents via Company XYZ's web site).
    \25\ Id. at Ex. 6. Under this interpretation, we also believe, 
and we further clarify today, that an issuer or broker-dealer may 
rely on a consent obtained by a third-party document delivery 
service, but the issuer or broker-dealer retains the ultimate 
responsibility for assuring that the consent is authentic and for 
the delivery of required documents.
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    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.
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    \26\ Generally, a consent is considered to be informed when an 
investor is apprised that the document to be provided will be 
available through a specific electronic medium or source (for 
example, through a limited proprietary system or at an Internet web 
site) and that there may be costs associated with delivery (for 
example, in connection with online time). In addition, for a consent 
to be informed an investor must be apprised of the time and scope 
parameters of the consent. For example, an investor should be made 
aware of whether the consent is indefinite and extends to more than 
one type of document. See note 29 of the 1995 Release, n. 11 above, 
for a discussion of the information that must be disclosed in an 
informed consent.
    \27\ We recognize that some brokerage firms require accounts to 
be opened online and all account transactions to be initiated and 
conducted online. In these instances only, the opening of a 
brokerage account may be conditioned upon providing global consent 
to electronic delivery.
    \28\ See the 1995 Release, n. 11 above, at Section II.C.
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    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\
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    \29\ See n. 18 above.
    \30\ See, for example, Ex. 3 in Section E below.
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    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\
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    \31\ See, for example, Ex. 4 in Section E below.
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3. Use of Portable Document Format
    The 1995 Release stated that ``the use of a particular medium 
should not be so burdensome that intended recipients cannot effectively 
access the information provided.'' \32\ Many issuers have interpreted 
this statement to preclude delivery of PDF documents which cannot be 
accessed without special software. Instead, those issuers use hypertext 
markup language, or HTML, which may be viewed without the need for 
additional software.\33\ We believe that issuers and market 
intermediaries delivering documents electronically may use PDF if it is 
not so burdensome as effectively to prevent access. For example, PDF 
could be used if issuers and intermediaries
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    \32\ See the 1995 Release, n. 11 above, at n. 24 and the 
accompanying text.
    \33\ In 1999, we began modernizing the Electronic Data 
Gathering, Analysis and Retrieval, or EDGAR, system. See Securities 
Act Release No. 7684 (May 17, 1999) [64 FR 27888]. One effect of the 
modernization was to allow filings to be submitted in HTML. Filers 
also were given the option of accompanying their required filings 
with unofficial copies in PDF.
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     inform investors of the requirements necessary to download 
PDF when obtaining consent to electronic delivery; and
     provide investors with any necessary software and 
technical assistance at no cost.\34\
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    \34\ See, for example, Ex. 5 in Section E below. We remind 
issuers and intermediaries that we will not consider an 
electronically delivered document to have been preceded or 
accompanied by another electronic document unless investors are 
provided with reasonably comparable access to both documents. See 
the 1996 Release, n. 15 above, at Ex. 4.
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4. Clarification of the ``Envelope Theory''
    The 1995 Release provided a number of examples designed to assist 
issuers and market intermediaries in meeting their delivery obligations 
through electronic media. One example provided that documents in close 
proximity on the same web site menu are considered delivered 
together.\35\ Other examples confirmed the proposition that documents 
hyperlinked to each other are considered delivered together as if they 
were in the same paper envelope.\36\ The premise

[[Page 25847]]

underlying these examples has come to be called the ``envelope 
theory.''
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    \35\ See the 1995 Release, n. 11 above, at Ex. 14.
    \36\ Id. at Ex. 15 and Ex. 16.
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    The purpose of these examples was to provide assurance to issuers 
and intermediaries that they are delivering multiple documents 
simultaneously to investors when so required by the federal securities 
laws. For example, in a registered offering, sales literature cannot be 
delivered to an investor unless the registration statement has been 
declared effective and a final prospectus accompanies or precedes the 
sales literature.\37\ It is easy to establish concurrent delivery when 
multiple documents are included in one paper envelope that is delivered 
by U.S. postal mail or a private delivery service. When electronic 
delivery is used, however, it is somewhat more difficult to establish 
whether multiple documents may be considered delivered together. The 
guidance provided in the 1995 Release about the use of ``virtual'' 
envelopes was intended to alleviate this difficulty.
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    \37\ See Sections 2(a)(10) and 5(b) of the Securities Act, 15 
U.S.C.Secs. 77b(a)(10) and 77e(b).
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    Nevertheless, some issuers and intermediaries believe that the 
envelope theory has created ambiguities as to appropriate web site 
content when an issuer is in registration.\38\ Some securities lawyers 
have expressed concern that if a Section 10 prospectus is posted on a 
web site, the operation of the envelope theory causes everything on the 
web site to become part of that prospectus. They also have raised 
concerns that information on a web site that is outside of the four 
corners of the Section 10 prospectus, but in close proximity \39\ to 
it, would be considered free writing.\40\
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    \38\ Some securities lawyers have raised similar issues 
concerning the use of a web site in connection with proxy 
solicitations, tender offers and other transactions that require 
documents to be filed or delivered under the federal securities 
laws. Although the guidance in this section focuses on issues 
relating to the registration process, it applies by analogy to all 
documents required to be filed or delivered under the federal 
securities laws.
    \39\ In Example 14 of the 1995 Release, see n. 11 above, we 
stated that documents that appear in close proximity to each other 
on the same web site menu are considered delivered together. Given 
the layout of a typical web page, which often includes multiple 
``buttons'' spread throughout the page rather than in menu format, 
issuers may be confused by our reference in the 1995 Release to 
``menu.'' Two or more documents will be considered to be delivered 
together if the buttons are in proximity to each other on the same 
screen, whether or not they are on the same ``menu.''
    \40\ By ``free writing,'' we mean communications that would 
constitute an ``offer to sell,'' ``offer for sale'' or ``offer,'' 
including every attempt or offer to dispose of, or solicitation of 
an offer to buy, a security or interest in a security, for value 
under Section 2(a)(3) of the Securities Act made by means other than 
a prospectus satisfying the requirements of Section 10 of the 
Securities Act, 15 U.S.C. 77j. Section 2(a)(10) of the Securities 
Act defines the term ``prospectus.''
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    Information on a web site would be part of a Section 10 prospectus 
only if an issuer (or person acting on behalf of the issuer, including 
an intermediary with delivery obligations) acts to make it part of the 
prospectus. For example, if an issuer includes a hyperlink within a 
Section 10 prospectus, the hyperlinked information would become a part 
of that prospectus.\41\ When embedded hyperlinks are used,\42\ the 
hyperlinked information must be filed as part of the prospectus in the 
effective registration statement and will be subject to liability under 
Section 11 of the Securities Act.\43\ In contrast, a hyperlink from an 
external document to a Section 10 prospectus would result in both 
documents being delivered together, but would not result in the non-
prospectus document being deemed part of the prospectus. Issuers 
nevertheless may be subject to liability under Section 12 of the 
Securities Act \44\ for the external document depending on whether the 
external document is itself a prospectus or part of one.
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    \41\ When an issuer includes a hyperlink within a document 
required to be filed or delivered under the federal securities laws, 
we believe it is appropriate for the issuer to assume responsibility 
for the hyperlinked information as if it were part of the document. 
We believe that the inclusion of a hyperlink to an external web site 
or document demonstrates the hyperlinking party's intent to make the 
information part of its communication with investors, security 
holders and the markets. Additionally, because written offers must 
be made exclusively through a Section 10 prospectus, when an issuer 
includes a hyperlink to an external web site or document within a 
Section 10 prospectus, the issuer expresses its intent to have the 
hyperlinked information treated as part of this exclusive means of 
offering its securities. An issuer (or person acting on behalf of 
the issuer, including an intermediary with delivery obligations) 
must make it clear to investors where the document from which it is 
hyperlinking begins and where it ends.
    We are aware that today many standard software programs can 
automatically convert an inactive uniform resource locator, or URL, 
into an active hyperlink, either at the time the document including 
the URL is created or when the document is later accessed. 
Consequently, as with an embedded hyperlink, an issuer that includes 
a URL to a web site in a Section 10 prospectus or other document 
required to be filed or delivered under the federal securities laws 
is responsible for information on the site that is accessible 
through the resulting hyperlink. To the extent that the document is 
required to be filed with the Commission, the hyperlinked 
information must be filed as part of the document. Inclusion of the 
URL to the Commission's Internet web site is mandated by some of our 
disclosure requirements. See, for example, Item 502(a)(2) of 
Regulation S-K, 17 CFR 229.502(a)(2); Item 12(c)(2)(ii) of Form S-3, 
17 CFR 239.13. Additionally, the Division of Corporation Finance has 
previously indicated that the inclusion of the URL for an issuer's 
web site in a registration statement, along with the statement 
``[O]ur SEC filings are also available to the public from our web 
site,'' will not, by itself, include or incorporate by reference the 
information on the site into the registration statement (unless the 
issuer otherwise acts to incorporate the information by reference). 
See Division of Corporation Finance interpretive letters Baltimore 
Gas and Electric Company (Jan. 6, 1997); ITT Corporation (Dec. 6, 
1996). In these two situations, we would not consider the presence 
of the URL to make our web site, or an issuer's web site, as the 
case may be, part of a document if the party presenting the URL 
takes reasonable steps to ensure that the URL is inactive (for 
example, by removing ``a>href'' tagging) and includes a statement to 
denote that the URL is an inactive textual reference only.
    \42\ An issuer may not use embedded hyperlinks exclusively to 
satisfy the line item disclosure requirements of its filings under 
the federal securities laws. For example, an issuer filing a 
registration statement on Form S-1, 17 CFR 239.11, could include 
embedded hyperlinks to its Exchange Act reports so that they are 
readily available, but only if the issuer otherwise includes full 
disclosure of all required issuer information within the body of the 
Section 10 prospectus. This is because the Commission's rules and 
forms contemplate a single comprehensive, integrated document so 
that readers can understand the document's content without having to 
access numerous other documents.
    We also note that simply embedding a hyperlink within a document 
does not satisfy the line item disclosure requirement for the 
incorporation of certain information by reference as provided under 
the Commission's rules and forms. In order for a document to be 
incorporated by reference in a filed document, an issuer must 
include a statement to that effect in the document listing the 
incorporated documents. See, for example, Item 12(a) of Part I of 
Form S-3; General Instruction G(4) of Form 10-K, 17 CFR 249.310; 
Exchange Act Rule 12b-23(b), 17 CFR 240.12b-23(b).
    \43\ 15 U.S.C. 77k. See, for example, Ex. 6 in Section E below. 
Of course, other Securities Act and Exchange Act liability 
provisions also may apply. See, for example, Sections 12(a)(2) and 
17(a) of the Securities Act, 15 U.S.C. 77l(a)(2) and 77q(a), Section 
10(b) of the Exchange Act, 15 U.S.C 78j(b), and Rule 10b-5, 17 CFR 
240.10b-5. Although a prospectus or other disclosure document on an 
issuer's web site may contain a hyperlink to an external web site or 
document under the circumstances described in this section, a 
hyperlink to an external site or document (including exhibits) 
currently may not be embedded in any filed EDGAR document. See Rule 
105 of Regulation S-T, 17 CFR 232.105; Securities Act Release No. 
7684 (May 17, 1999) [64 FR 27888]. However, filers may include 
hyperlinks to different sections within a single HTML document. 
Under our recently adopted rules implementing the next phase of 
EDGAR modernization, the system now permits hyperlinks from an EDGAR 
filing to its exhibits and to other filings in the EDGAR database on 
our Internet web site at http://www.sec.gov>. See Securities Act 
Release No. 7855 (Apr. 24, 2000) [65 FR 24788]. The new rules 
address the liability treatment of material hyperlinked from the 
EDGAR database into EDGAR filings, but do not address broader issues 
of hyperlinks on issuers' web sites.
    \44\ 15 U.S.C. 77l.
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    With respect to the free writing concern, the focus on the location 
of the posted prospectus is misplaced. Regardless of whether or where 
the Section 10 prospectus is posted, the web site content must be 
reviewed in its entirety to determine whether it contains impermissible 
free writing.\45\

[[Page 25848]]

The Commission staff will continue to raise questions about information 
on an issuer's web site that is either inconsistent with the issuer's 
Section 10 prospectus or that would constitute an ``offer to sell,'' 
``offer for sale'' or ``offer'' under Section 2(a)(3) of the Securities 
Act.
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    \45\ See n. 40 above. While the proximity of information on an 
issuer's web site to a Section 10 prospectus posted on the same site 
will determine whether multiple documents are delivered together, it 
does not dispose of the issue of whether the information would 
constitute an ``offer to sell,'' ``offer for sale'' or ``offer'' 
under Section 2(a)(3) of the Securities Act. We provide guidance in 
Section B below about permissible communications on an issuer's web 
site when the issuer is in registration.
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    Municipal securities market participants involved in offering and 
selling municipal securities face similar issues under Exchange Act 
Rule 15c2-12 \46\ in connection with their use of electronic media. 
Rule 15c2-12 requires municipal securities underwriters of primary 
offerings to, among other things,
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    \46\ 17 CFR 240.15c2-12.
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     obtain and review an official statement that the municipal 
securities issuer deems final;
     send the final official statement to any potential 
customer; and
     in negotiated sales, send the most recent preliminary 
official statement, if one exists, to any potential customer.
Under Rule 15c2-12, a final official statement can be a single document 
or set of documents. In a municipal securities offering, if a municipal 
securities issuer puts its official statement on its web site and also 
establishes hyperlinks to other web sites, a question arises as to what 
constitutes the final official statement that a municipal securities 
underwriter has an obligation to obtain and send to potential 
customers. For purposes of satisfying its obligations under Rule 15c2-
12, a municipal securities underwriter may rely on the municipal 
securities issuer to identify which of the documents on, or hyperlinked 
from, the issuer's web site comprise the preliminary, deemed final and 
final official statements, even if the issuer's web site contains other 
documents or hyperlinks to other web sites. Hyperlinks embedded within 
an official statement itself, however, will be considered part of the 
official statement, even if a municipal securities issuer has not 
specifically identified the embedded hyperlinked information. For any 
municipal securities offering subject to Rule 15c2-12, the paper and 
electronic versions of each of the preliminary, deemed final and final 
official statements must be the same. Municipal securities issuers are 
reminded that, whether or not the offering of their securities is 
exempt from Rule 15c2-12, the anti-fraud provisions of the federal 
securities laws apply to their official statements and other 
disclosures. \47\
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    \47\ See Exchange Act Release No. 7049 (Mar. 9, 1994) [59 FR 
12748]. All issuers, whether offering and selling securities in 
registered or exempt offerings, are subject to anti-fraud liability. 
See Section 17(a) of the Securities Act, Section 10(b) of the 
Exchange Act and Rule 10b-5.
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B. Web Site Content

    Issuers have raised a number of questions about their 
responsibility for the content of their web sites, both when they are 
in registration and when they are not. It is important for issuers, 
including municipal securities issuers, to keep in mind that the 
federal securities laws apply in the same manner to the content of 
their web sites as to any other statements made by or attributable to 
them. While many of these questions may be resolved by reference to 
current law, we recognize that further guidance would be helpful on two 
fundamental issues affecting web site content. We first consider issuer 
responsibility for hyperlinked information under the anti-fraud 
provisions of the federal securities laws. We then discuss the 
regulation of issuers' web site communications during registered 
offerings.
1. Issuer Responsibility for Hyperlinked Information
    Issuers \48\ are responsible for the accuracy of their statements 
that reasonably can be expected to reach investors or the securities 
markets \49\ regardless of the medium through which the statements are 
made, including the Internet. Some issuers have asked whether they can 
be held liable under Section 10(b) of the Exchange Act and Rule 10b-5 
for third-party information to which they have hyperlinked from their 
web sites.\50\ This concern stems largely from case law \51\ and our 
findings in the 1997 settlement of an enforcement action.\52\ These 
questions focus on the consequences of issuer hyperlinks to analyst 
research reports, although issuers also have expressed concern about 
their potential liability for hyperlinks to other information as well.
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    \48\ While our guidance in this section addresses the 
responsibilities of issuers, broker-dealers and investment advisers 
also should carefully consider their responsibilities for 
hyperlinked information.
    \49\ See Securities Act Release No. 6504 (Jan. 20, 1984) [49 FR 
2468]. Where a statement is materially misleading, an issuer and any 
persons responsible for the statement would be liable under the 
anti-fraud provisions of the federal securities laws. See, for 
example, SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) 
(en banc), cert. denied sub nom., Coates v. SEC, 394 U.S. 976 
(1969).
    \50\ When an issuer is offering or selling securities, similar 
questions arise under Section 17(a) of the Securities Act. Although 
our discussion is framed in terms of Section 10(b) of the Exchange 
Act and Rule 10b-5, it applies equally to questions arising under 
Section 17(a).
    \51\ See n. 54 below.
    \52\ See In the Matter of Presstek, Inc., Exchange Act Release 
No. 39472 (Dec. 22, 1997), n. 54 below.
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    Whether third-party information is attributable to an issuer 
depends upon whether the issuer has involved itself in the preparation 
of the information or explicitly or implicitly endorsed or approved the 
information. In the case of issuer liability for statements by third 
parties such as analysts, the courts and we have referred to the first 
line of inquiry as the ``entanglement'' theory and the second as the 
``adoption'' theory.
    In the case of hyperlinked information, liability under the 
``entanglement'' theory would depend upon an issuer's level of pre-
publication involvement in the preparation of the information.\53\ In 
contrast, liability under the ``adoption'' theory would depend upon 
whether, after its publication, an issuer, explicitly or implicitly, 
endorses or approves the hyperlinked information.\54\
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    \53\ See, for example, Elkind v. Liggett & Myers, Inc., 635 F.2d 
156 (2d Cir. 1980); In the Matter of Syntex Corp. Sec. Litig., 855 
F.Supp. 1086 (N.D. Cal. 1993); In the Matter of Caere Corp. Sec. 
Litig., 837 F. Supp. 1054 (N.D. Cal. 1993).
    \54\ See, for example, In the Matter of Cypress Semiconductor 
Sec. Litig., 891 F. Supp. 1369, 1377 (N.D. Cal. 1995), aff'd sub 
nom. Eisenstadt v. Allen, 113 F.3d 1240 (9th Cir. 1997) 
(``distributing analysts' reports to potential investors may, 
depending on the circumstances, amount to an implied representation 
that the reports are accurate''); In the Matter of RasterOps 
Corporation Sec. Litig., [1994-95 Tr. Binder] Fed.Sec.L.Rep. (CCH) 
para. 98,467 (N.D. Cal. 1994) (``act of circulating the reports 
amounts to an implied representation that the information contained 
in the reports is accurate or reflects the company's views''). See 
also Presstek, n. 52 above. In Presstek, we stated that ``in the 
Commission's view, under certain circumstances, an issuer that 
disseminates false third-party reports may adopt the contents of 
those reports and be fully liable for the misstatements contained in 
them, even if it had no role whatsoever in the preparation of the 
report.'' Id. at 32.
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    Below we discuss factors that we believe are relevant in deciding 
whether an issuer has adopted information on a third-party web site to 
which it has established a hyperlink.\55\ While the

[[Page 25849]]

factors we discuss below form a useful framework of analysis, we 
caution that they are neither exclusive nor exhaustive. We are not 
establishing a ``bright line'' mechanical test. We do not mean to 
suggest that any single factor, standing alone, would or would not 
dictate the outcome of the analysis.
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    \55\ We do not discuss the application of the ``entanglement'' 
theory to hyperlinked information on third-party web sites. We 
recognize that the ``entanglement'' and ``adoption'' theories often 
overlap and that some of the factors relating to an adoption 
analysis also may apply to an entanglement analysis. Once the 
threshold issue of whether hyperlinked third-party information has 
been adopted by an issuer has been answered, a trier of fact would 
then turn to the issue of whether a claim has been established under 
Section 10(b) of the Exchange Act and Rule 10b-5. A claim under 
Section 10(b) and Rule 10b-5 generally includes the following 
elements:
    --misrepresentation of a material fact or omission of a material 
fact necessary to make a statement, in light of the circumstances 
under which it was made, not misleading,
    --in the sale, or in connection with the purchase or sale, of a 
security,
    --with the requisite state of mind, or scienter.
    Liability to a private plaintiff also requires proof that the 
plaintiff justifiably relied on the statement containing the 
material misrepresentation or omission and was injured as a result. 
See, for example, Robbins v. Koger Properties, Inc., 116 F.3d 1441, 
1447 (11th Cir. 1997). Investor reliance on a material 
misrepresentation or omission need not be shown in a Commission 
enforcement action. See Ernst & Ernst v. Hochfelder, 425 U.S. 185 
(1976). Under certain circumstances, there may be a rebuttable 
presumption of reliance. See, for example, Basic, Inc. v. Levinson, 
485 U.S. 224 (1988) (discussing the ``fraud on the market'' theory). 
Similarly, where materiality is established, reliance in an 
omissions case is presumed. See Affiliated Ute Citizens of Utah v. 
United States, 406 U.S. 128 (1972).
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a. Context of the Hyperlink
    Whether third-party information to which an issuer has established 
a hyperlink is attributable to the issuer is likely to be influenced by 
what the issuer says about the hyperlink or what is implied by the 
context in which the issuer places the hyperlink. An issuer might 
explicitly endorse the hyperlinked information. For example, a 
hyperlink might be incorporated in or accompany a statement such as 
``XYZ's web site contains the best description of our business that is 
currently available.'' Likewise, a hyperlink might be used to suggest 
that the hyperlinked information supports a particular assertion on an 
issuer's web site. For example, the hyperlink may be incorporated in or 
accompany a statement such as, ``As reported in Today's Widget, our 
company is the leading producer of widgets worldwide.'' Moreover, even 
when an issuer remains silent about the hyperlink, the context 
nevertheless may imply that the hyperlinked information is attributable 
to the issuer.\56\
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    \56\ See Section B.1.c below.
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    In the context of a document required to be filed or delivered 
under the federal securities laws, we believe that when an issuer 
embeds a hyperlink to a web site within the document, the issuer should 
always be deemed to be adopting the hyperlinked information.\57\ In 
addition, when an issuer is in registration, if the issuer establishes 
a hyperlink (that is not embedded within a disclosure document) from 
its web site to information that meets the definition of an ``offer to 
sell,'' ``offer for sale'' or ``offer'' under Section 2(a)(3) of the 
Securities Act, a strong inference arises that the issuer has adopted 
that information for purposes of Section 10(b) of the Exchange Act and 
Rule 10b-5.\58\
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    \57\ See Section A.4 above.
    \58\ See Section B.2 below for a discussion of the effect of an 
issuer hyperlink to information on a third-party web site for 
purposes of Section 5 of the Securities Act.
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b. Risk of Confusion
    Another factor we would consider in determining whether an issuer 
has adopted hyperlinked information is the presence or absence of 
precautions against investor confusion about the source of the 
information. Hyperlinked information on a third-party web site may be 
less likely to be attributed to an issuer if the issuer makes the 
information accessible only after a visitor to its web site has been 
presented with an intermediate screen that clearly and prominently 
indicates that the visitor is leaving the issuer's web site and that 
the information subsequently viewed is not the issuer's. Similarly, 
there may be less likelihood of confusion about whether an issuer has 
adopted hyperlinked information if the issuer ensures that access to 
the information is preceded or accompanied by a clear and prominent 
statement from the issuer disclaiming responsibility for, or 
endorsement of, the information. In contrast, the risk of investor 
confusion is higher when information on a third-party web site is 
framed \59\ or inlined.\60\ We are not suggesting, however, that 
statements and disclaimers will insulate an issuer from liability for 
hyperlinked information when the relevant facts and circumstances 
otherwise indicate that the issuer has adopted the information.\61\
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    \59\ ``Framing'' involves a form of hyperlinking. Upon clicking 
highlighted text, graphics or a button, information from a separate 
web site is imported into the web site that is being used and is 
displayed within a constant on-screen border, or frame. In this 
case, information from an issuer's web site and the hyperlinked web 
site would be visible at the same time. The user may not be aware 
that the displayed material is actually from a different web site.
    \60\ ``Inlining'' is similar to framing but does not result in a 
visible border. As with framing, information from an issuer's web 
site and the hyperlinked web site would be visible at the same time. 
Also, as with framing, a web site user may not be aware that the 
displayed material is actually from a different web site.
    \61\ Some of our prior statements may have created the erroneous 
impression that the use of a disclaimer, in and of itself, may be 
effective to shield an issuer from adoption of, and liability under 
Section 10(b) of the Exchange Act and Rule 10b-5 in connection with, 
information on a third-party web site to which the issuer has 
established a hyperlink. See, for example, the 1998 Release, n. 15 
above, in which we addressed when the posting of offering or 
solicitation materials on a web site would not be considered 
activity taking place in the United States. The 1998 Release did not 
address the anti-fraud provisions of the federal securities laws, 
however, which continue to reach all Internet activities that 
satisfy the relevant jurisdictional tests. 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. To conclude otherwise 
would permit unscrupulous issuers to make false or misleading 
statements available to investors without fear of liability as long 
as the information is accompanied by a disclaimer. Further, we 
remind issuers that specific disclaimers of anti-fraud liability are 
contrary to the policies underpinning the federal securities laws. 
See Section 14 of the Securities Act, 15 U.S.C. 77n, Section 29(a) 
of the Exchange Act, 15 U.S.C. 78cc(a), Section 47(a) of the 
Investment Company Act, 15 U.S.C. 80a-46(a), and Section 215(a) of 
the Investment Advisers Act, 15 U.S.C. 80b-15(a).
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c. Presentation of the Hyperlinked Information
    The presentation of the hyperlinked information by an issuer is 
relevant in determining whether the issuer has adopted the information. 
For example, an issuer's efforts to direct an investor's attention to 
particular information by selectively providing hyperlinks is a 
relevant consideration in determining whether the information so 
hyperlinked has been adopted by the issuer. Where a wealth of 
information as to a particular matter is available, and where the 
information accessed by the hyperlink is not representative of the 
available information, an issuer's creation and maintenance of the 
hyperlink could be an endorsement of the selected information. 
Similarly, an issuer that selectively establishes and terminates 
hyperlinks to third-party web sites depending upon the nature of the 
information about the issuer on a particular site or sites may be 
viewed as attempting to control the flow of information to investors. 
Again, this suggests that the issuer has adopted the information during 
the periods that the hyperlink is operative.
    Finally, the layout of the screen containing a hyperlink is 
relevant in determining whether an issuer will be deemed to have 
adopted hyperlinked information. Any action to differentiate a 
particular hyperlink from other hyperlinks on an issuer's web site, 
through its prominence, size or location, or to draw an investor's 
attention to the hyperlink, may suggest that the issuer favors the 
hyperlinked information over other information available to the 
investor on or through the site. For example, a particular hyperlink 
might be presented in a different color, type font or size from other 
hyperlinks on an issuer's web site. Where the method of presenting the 
hyperlink influences disproportionately an investor's decision to view 
third-party information, the hyperlinked information is more likely 
attributable to an issuer.

[[Page 25850]]

2. Issuer Communications During a Registered Offering
    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 Act \63\ 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.
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    \62\ In Securities Act Release No. 7606A (Nov. 13, 1998) [63 FR 
67174], we proposed exemptions to address many of the issues in this 
area. We will continue to consider these proposals as part of a 
broader regulatory review of restrictions on communications. We also 
have adopted rules relaxing restrictions on communications in the 
business combination context. If a registered offering involves a 
merger or other business combination, new Securities Act Rules 165 
and 166, 17 CFR 230.165 and 230.166, enable the parties to the 
transaction or persons acting on their behalf to communicate 
information about the transaction and the parties to it outside of 
the Section 10 prospectus. See Securities Act Release No. 7760 (Oct. 
22, 1999) [64 FR 61408]. Thus, information relating to a business 
combination may remain on an issuer's web site provided it is filed 
in accordance with Securities Act Rule 425, 17 CFR 230.425.
    \63\ 15 U.S.C. 77e.
    \64\ Except with respect to business combinations, no offers of 
any kind may be made before filing a registration statement. Section 
5(c) of the Securities Act, 15 U.S.C. 77e(c). During the period 
between filing and delivery of the final prospectus, written offers 
and offers transmitted by radio or television must conform to the 
requirements of Section 10 of the Securities Act. See Sections 
2(a)(10) and 5(b) of the Securities Act.
    \65\ See n. 68 below. From a policy standpoint, regulating 
communications during the offering process can be justified as a 
reasonable balancing of the incentives that the process creates for 
participants to stimulate interest in an issuer's securities. During 
the offering process ``the increased compensation to distributors 
and the compressed period of the selling effort, as well as the 
issuer's interest in obtaining funds, set up a situation in which 
potential conflicts of interest between investors and sellers are 
enhanced.'' See Reforming the Securities Act of 1933--A Conceptual 
Framework, an Address by Linda C. Quinn, Director, Division of 
Corporation Finance, Securities and Exchange Commission, to the 
American Bar Association, Section of Business Law, Committee on 
Federal Regulation of Securities, Fall Meeting, Nov. 11, 1995, at 6.
    \66\ See Section B.1.a above for a discussion of the effect of 
an issuer hyperlink to information on a third-party web site for 
purposes of the anti-fraud provisions of the federal securities 
laws. We note that the ``safe harbor'' from Section 5 of the 
Securities Act contained in Securities Act Rule 137, 17 CFR 230.137, 
that permits broker-dealers not participating in a distribution to 
publish or distribute research without the research being deemed to 
be an ``offer'' for purposes of Sections 2(a)(11) of the Securities 
Act, 15 U.S.C. 77b(a)(11), and the ``safe harbors'' from Section 5 
contained in Securities Act Rules 138 and 139, 17 CFR 230.138 and 
230.139, that permit broker-dealers to publish or distribute 
research without the research being deemed to be an ``offer to 
sell'' or ``offer for sale'' for purposes of Sections 2(a)(10) and 
5(c) of the Securities Act, do not extend to permit issuers to 
publish or distribute the same information. See the 1995 Release, n. 
11 above, at Ex. 16.
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    An issuer that is in registration should maintain communications 
with the public as long as the subject matter of the communications is 
limited to ordinary-course business and financial information, which 
may include the following:
     advertisements concerning the issuer's products and 
services;
     Exchange Act reports required to be filed with the 
Commission;
     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 
holder inquiries relating to these matters.\67\
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    \67\ See, for example, the information guidelines contained in 
Securities Act Release No. 5180 (Aug. 16, 1971) [36 FR 16506]; 
Securities Act Release No. 5009 (Oct. 7, 1969) [34 FR 16870]; 
Securities Act Release No. 4697 (May 28, 1964) [29 FR 7317]; and 
Securities Act Release No. 3844 (Oct. 8, 1957) [22 FR 8359].
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    Statements containing information falling within any of the 
foregoing categories, or an available Securities Act safe harbor,\68\ 
may be posted on an issuer's web site when in registration, either 
directly or indirectly through a hyperlink to a third-party web site, 
including the web site of a broker-dealer that is participating in the 
registered offering.
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    \68\ Limited issuer statements about an offering may be made 
(electronically or otherwise) before the filing of a registration 
statement. Securities Act Rule 135, 17 CFR 230.135, permits an 
issuer to notify the public of a proposed offering of securities 
during the pre-filing period as long as the contents of the notice 
do not exceed the items specified in the rule. Securities Act Rule 
135c, 17 CFR 230.135c, permits issuers subject to the reporting 
requirements of the Exchange Act, and certain exempt foreign 
issuers, to make public announcements of proposed private offerings 
of securities without any such announcement being deemed an 
``offer'' for purposes of Section 5 of Securities Act, as long as it 
is not used to condition the market and is limited to the factual 
items specified in the rule. These safe harbors also may be invoked 
after the filing of a registration statement. Once a registration 
statement has been filed, an issuer may publish (electronically or 
otherwise) a brief description of its business and limited 
additional information on the securities being offered. Securities 
Act Rule 134, 17 CFR 230.134, permits an issuer to make limited 
offering communications following the filing of a registration 
statement as long as the contents of the communications are limited 
to the items specified in the rule and the other conditions of the 
rule are met.
    Securities Act Rule 135e, 17 CFR 230.135e, permits a foreign 
private issuer and other offering participants to provide 
journalists with access to offshore press activities that discuss a 
present or proposed offering of securities. Rule 135e requires that 
press-related materials be released only outside the United States 
and that press conferences be held outside the United States. As a 
result, we believe that dissemination through the Internet by the 
issuer or other person covered by Rule 135e of these materials or 
press conferences will not comply with Rule 135e unless procedures 
are implemented to assure that only permitted recipients under the 
rules are able to access the information.
    We also have adopted special safe harbor rules for mutual funds, 
which, unlike typical corporate issuers, continuously offer and sell 
their shares to the public and, therefore, are continuously subject 
to the limitations on issuer communications under the Securities 
Act. Securities Act Rule 482, 17 CFR 230.482, permits a mutual fund 
to advertise performance and other information about the fund, 
provided that the advertisement contains only information the 
substance of which is included in the fund's prospectus. Securities 
Act Rule 134 contains special provisions for mutual funds, 
permitting funds to advertise a broad range of information, other 
than performance information.
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    Although our original guidance was directed at communications by 
reporting issuers when in registration, it also should be observed by 
non-reporting issuers preparing to offer securities to the public for 
the first time. A non-reporting issuer that has established a history 
of ordinary course business communications through its web site should 
be able to continue to provide business and financial information on 
its site consistent with our original guidance. A non-reporting issuer 
preparing for its first registered public offering that 
contemporaneously establishes a web site, however, may need to apply 
this guidance more strictly when evaluating its web site content 
because it may not have established a history of ordinary-course 
business communications with the

[[Page 25851]]

marketplace. Thus, its web site content may condition the market for 
the offering and, due to the unfamiliarity of the marketplace with the 
issuer or its business, investors may be unable to view the issuer's 
communications in an appropriate context while the issuer is in 
registration. In other words, investors may be less able to distinguish 
offers to sell an issuer's securities in a registered offering from 
product or service promotional activities or other business or 
financial information.

C. Online Offerings

1. Online Public Offerings
    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\
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    \69\ See Division of Corporation Finance no-action letter Wit 
Capital Corporation (July 14, 1999).
    \70\ We are aware that municipal securities issuers and 
municipal securities underwriters have begun to evaluate the online 
offering process and that a limited number of offerings have been 
conducted over the Internet. At this time, we are not addressing the 
implications of online municipal securities offerings, but we 
encourage comment on this topic. We remind municipal securities 
issuers and other municipal securities market participants, however, 
of the potential issue that arises if the municipal securities 
offering also involves an offering of a separate security that is 
not being sold pursuant to the exemption from registration contained 
in Section 3(a)(2) of the Securities Act, 15 U.S.C. 77c(a)(2). If 
the municipal securities offering involves an offering of a separate 
security that is being sold in reliance on an exemption from 
registration contained in Section 4(2) of the Securities Act, 15 
U.S.C. 77d(2), or Regulation D, 17 CFR 230.501, et seq., or in a 
registered offering, our discussion in Section C.2 below applies. 
We, therefore, caution municipal securities offering participants 
wishing to offer municipal securities online to evaluate carefully 
whether any separate security is being sold.
    \71\ See Joseph Weber & Peter Elstrom, Transforming the Art of 
the Deal, Bus. Wk., July 26, 1999, at 96; Shawn Tully, Will the Web 
Eat Wall Street?, Fortune, Aug. 2, 1999, at 112.
    \72\ There also have been numerous reports where investors 
complained that they did not receive shares in an online IPO. See 
Randall Smith, So Far, ``E-Underwriting'' Gets a Slow Start, Wall 
St. J., Aug. 16, 1999, at C1. See also Randall Smith, Online Brokers 
to Form Bank in Bid for IPOs, Wall St. J., Nov. 15, 1999, at C1; 
Randall Smith & Lee Gomes, How Get Rich Hopes of Linux Techies Went 
Up in Flames, Wall St. J., Aug. 18, 1999, at A1.
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    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\
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    \73\ Section 5(a) of the Securities Act, 15 U.S.C. 77e(a).
    \74\ Securities Act Rule 134(d), 17 CFR 230.134(d).
---------------------------------------------------------------------------

    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.
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    \75\ See Sections 2(a)(10) and 5(b) of the Securities Act. 
Section 5(c) of the Securities Act also proscribes both oral and 
written offers before the filing of a registration statement or 
while the registration statement is subject to a refusal order, stop 
order or, before effectiveness, any other public proceeding or 
examination under Section 8 of the Securities Act, 15 U.S.C. 77h. 
For a description of the new rules regarding communications in a 
business combination context, see n. 62 above.
    Mutual funds are permitted to make written offers before 
delivery of the final prospectus under Securities Act Rule 482 
(permitting advertisements containing only information ``the 
substance of which'' is included in the fund's prospectus) and 
Securities Act Rule 498, 17 CFR 230.498 (permitting the use of a 
``profile,'' a summary disclosure document). Both Rule 482 
advertisements and fund profiles are prospectuses under Section 
10(b) of the Securities Act, which permits a prospectus that omits 
in part or summarizes information to be used to make offers before 
delivery of the final prospectus.
    \76\ See Securities Act Rules 134 and 135, n. 68 above.
    \77\ See Sections 2(a)(10) and 5(b) of the Securities Act. A 
confirmation of sale is not deemed a non-conforming prospectus when 
sent or given after the effective date of a registration statement 
if a prospectus satisfying the requirements of Section 10(a) of the 
Securities Act is sent or given before or with the confirmation.
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    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.
---------------------------------------------------------------------------

    \78\ See Wit Capital Corporation, n. 69 above.
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2. Online Private Offerings under Regulation D
    Broad use of the Internet for exempt securities offerings under 
Regulation D is problematic because of the requirement that these 
offerings not involve a general solicitation or advertising.\79\ When 
we first considered

[[Page 25852]]

whether exempt offerings could be conducted over the Internet, we 
concluded that an issuer's unrestricted, and therefore publicly 
available, Internet web site would not be consistent with the 
restriction on general solicitation and advertising. Specifically, the 
1995 Release included an example indicating that an issuer's use of an 
Internet web site in connection with a purported private offering would 
constitute a ``general solicitation'' and therefore disqualify the 
offering as ``private.'' \80\
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    \79\ See Rule 502(c) of Regulation D, 17 CFR 230.502(c). General 
solicitation or advertising is prohibited in offerings under Rules 
504, 505 and 506 of Regulation D, 17 CFR 230.504, 230.505 and 
230.506. An exception to the prohibition against general 
solicitation applies to some limited offerings under Rule 504(b)(1), 
17 CFR 230.504(b)(1), when an issuer has satisfied state securities 
laws of specified types. See Securities Act Release No. 7644 (Feb. 
25, 1999) [64 FR 11090]. The discussion in this section presumably 
also would apply to private offerings conducted in reliance on the 
exemption from registration contained in Section 4(2) of the 
Securities Act.
    \80\ See the 1995 Release, n. 11 above, at Ex. 20.
    Municipal securities issuers and other municipal securities 
market participants conducting online offerings are directed to our 
discussion in n. 70 above of the issue that arises if the municipal 
securities offering also involves an offering of a separate security 
that is not being sold pursuant to the exemption from registration 
contained in Section 3(a)(2) of the Securities Act.
---------------------------------------------------------------------------

    Subsequently, the Divisions of Corporation Finance and Market 
Regulation issued interpretive guidance to a registered broker-dealer 
and its affiliate, IPONET,\81\ that planned to invite previously 
unknown prospective investors to complete a questionnaire posted on the 
affiliate's Internet web site ``as a means of building a customer base 
and database of accredited and sophisticated investors'' for the 
broker-dealer.\82\ A password-restricted web page permitting access to 
private offerings would become available to a prospective investor only 
after the affiliated broker-dealer determined that the investor was 
``accredited'' or ``sophisticated'' within the meaning of Regulation 
D.\83\ Additionally, a prospective investor could purchase securities 
only in offerings that were posted on the restricted web site after the 
investor had been qualified by the affiliated broker-dealer as an 
accredited or sophisticated investor and had opened an account with the 
broker-dealer. The Divisions' interpretive letter was based on an 
important and well-known principle established over a decade ago: a 
general solicitation is not present when there is a pre-existing, 
substantive relationship between an issuer, or its broker-dealer, and 
the offerees.\84\
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    \81\ Divisions of Corporation Finance and Market Regulation 
interpretive letter IPONET (July 26, 1996).
    \82\ Id.
    \83\ See Rules 501(a) and 506(b)(2)(ii) of Regulation D, 17 CFR 
230.501(a) and 230.506(b)(2)(ii).
    \84\ See Division of Corporation Finance interpretive letters 
Woodtrails-Seattle, Ltd. (Aug. 9, 1982) (providing that no general 
solicitation exists when an issuer or any person acting on its 
behalf made offers to investors in prior limited partnerships 
sponsored by the general partner of the issuer); E.F. Hutton Co. 
(Dec. 3, 1985) (providing that no general solicitation exists when 
an offer is made to customers of a broker-dealer because of the 
broker's pre-existing, substantive relationship with its customers; 
further, providing that the requisite relationship could be 
established through a questionnaire providing the broker-dealer with 
sufficient information to evaluate the offeree's sophistication and 
financial situation). See also Division of Corporation Finance 
interpretive letters H.B. Shaine & Co., Inc. (May 1, 1987); Bateman 
Eichler, Hill Richards, Inc. (Dec. 3, 1985).
---------------------------------------------------------------------------

    We understand that some entities have engaged in practices that 
deviate substantially from the facts in the IPONET interpretive letter. 
Specifically, third-party service providers who are neither registered 
broker-dealers nor affiliated with registered broker-dealers have 
established web sites that generally invite prospective investors to 
qualify as accredited or sophisticated as a prelude to participation, 
on an access-restricted basis, in limited or private offerings 
transmitted on those web sites. Moreover, some non-broker-dealer web 
site operators are not even requiring prospective investors to complete 
questionnaires providing information needed to form a reasonable belief 
regarding their accreditation or sophistication. Instead, these web 
sites permit interested persons to certify themselves as accredited or 
sophisticated merely by checking a box. These web sites, particularly 
those allowing for self-accreditation, raise significant concerns as to 
whether the offerings that they facilitate involve general 
solicitations.\85\ In these instances, one method of ensuring that a 
general solicitation is not involved is to establish the existence of a 
``pre-existing, substantive relationship.'' \86\ Generally, staff 
interpretations of whether a ``pre-existing, substantive relationship'' 
exists have been limited to procedures established by broker-dealers in 
connection with their customers. This is because traditional broker-
dealer relationships require that a broker-dealer deal fairly with, and 
make suitable recommendations to, customers, and, thus, implies that a 
substantive relationship exists between the broker-dealer and its 
customers. We have long stated, however, that the presence or absence 
of a general solicitation is always dependent on the facts and 
circumstances of each particular case.\87\ Thus, there may be facts and 
circumstances in which a third party, other than a registered broker-
dealer, could establish a ``pre-existing, substantive relationship'' 
sufficient to avoid a ``general solicitation.'' \88\
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    \85\ These web sites would also call into question the ability 
of an issuer to form a reasonable belief, before sale, as to the 
qualification of the purchaser, which may be necessary depending on 
the nature of the exemption. See, for example, Rule 506(b)(2)(ii) of 
Regulation D. See also Section 3(c)(7) of the Investment Company 
Act, 15 U.S.C. 80a-3(c)(7).
    \86\ See Securities Act Release No. 6825 (Mar. 15, 1989) [54 FR 
11369] at n. 12 (``the staff has never suggested, and it is not the 
case, that prior relationship is the only way to show the absence of 
a general solicitation'').
    \87\ Id.
    \88\ We encourage web site operators offering these services to 
work with the Commission staff to resolve any securities law issues 
raised by their activities. We understand that securities lawyers 
may have interpreted staff responses to Lamp Technologies, Inc. as 
extending the ``pre-existing, substantive relationship'' doctrine to 
solicitations conducted by third parties other than a registered 
broker-dealer. See Divisions of Investment Management and 
Corporation Finance no-action letters Lamp Technologies, Inc. (May 
29, 1998) and Lamp Technologies, Inc. (May 29, 1997). We disagree. 
In the Lamp Technologies no-action letters, the staff of the 
Divisions of Investment Management and Corporation Finance 
recognized a separate means to satisfy the ``no general 
solicitation'' requirement solely in the context of offerings by 
private hedge funds that are excluded from regulation as investment 
companies pursuant to Sections 3(c)(1) and 3(c)(7) of the Investment 
Company Act, 15 U.S.C. 80a-3(c)(1) and 80a-3(c)(7).
---------------------------------------------------------------------------

    Notwithstanding the analysis for purposes of Section 5 of the 
Securities Act, web site operators need to consider whether the 
activities that they are undertaking require them to register as 
broker-dealers. Section 15 of the Exchange Act \89\ essentially makes 
it unlawful for a broker or dealer ``to effect any transactions in, or 
to induce or attempt to induce the purchase or sale of, any security 
(other than an exempted security or commercial paper, bankers' 
acceptances, or commercial bills)'' unless the broker or dealer is 
registered with the Commission.\90\ The ``exempted securities'' for 
which broker-dealer registration is not required under Section 15 are 
strictly limited.\91\ They do not include, for example, securities 
issued under Regulations A, D or S \92\ or privately placed securities 
that would be ``restricted'' securities under

[[Page 25853]]

Securities Act Rule 144.\93\ Thus, broker-dealer registration generally 
is required to effect transactions in securities that are exempt from 
registration under the Securities Act.\94\ In other words, third-party 
service providers that act as brokers in connection with securities 
offerings are required to register as broker-dealers, even when the 
securities are exempt from registration under the Securities Act.\95\
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 78o.
    \90\ See Section 15(a)(1) of the Exchange Act, 15 U.S.C. 
78o(a)(1).
    \91\ See Section 3(a)(12) of the Exchange Act, 15 U.S.C. 
78c(a)(12). These ``exempted securities'' include instruments such 
as interests or participations in any common trust fund or similar 
fund maintained by a bank, or certain interests or participations in 
a single or collective trust fund or securities arising out of a 
contract issued by an insurance company issued in connection with 
qualified plans (see Section 3(a)(12)(A)(iii) and (iv) of the 
Exchange Act, 15 U.S.C. Secs. 78c(a)(12)(A)(iii) and (iv)), as well 
as mortgage securities (see Exchange Act Rule 3a12-4, 17 CFR 
240.3a12-4) and certain designated foreign government securities 
(see Exchange Act Rule 3a12-8, 17 CFR 240.3a12-8).
    \92\ 17 CFR 230.251, et seq., 230.501, et seq. and 230.901, et 
seq.
    \93\ 17 CFR 230.144. The term ``exempted securities'' for 
broker-dealer registration purposes under the Exchange Act also does 
not include securities issued by religious, educational or 
charitable organizations that are exempt from registration under 
Section 3(a)(4) of the Securities Act, 15 U.S.C. 77c(a)(4), or 
securities that are exempted from registration by means of one of 
the transactional exemptions found in Section 4 of the Securities 
Act, 15 U.S.C. 77d.
    \94\ See the IPONET interpretive letter, n. 81 above. The 
Division of Market Regulation's response in this interpretive letter 
required that a registered broker-dealer maintain overall 
supervision of IPONET's activities; otherwise, IPONET would have 
been required to registered as a broker-dealer under Section 15(a) 
of the Exchange Act. The Commission requests the Division of Market 
Regulation to consider whether the activities of a web site 
operator, such as described in the no-action letters to Lamp 
Technologies, Inc., see n. 88 above, require the web site operator 
to register with the Commission as a broker-dealer.
    \95\ Staff guidance is available regarding whether a person is a 
broker-dealer subject to registration with the Commission. Questions 
on this subject should be addressed to the Office of Chief Counsel, 
Division of Market Regulation, Securities and Exchange Commission, 
450 Fifth Street, N.W., Washington, D.C. 20549-1001, (202) 942-0073.
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3. Broker-Dealer Capacity
    We have noted before that broker-dealers must have adequate 
facilities and personnel to promptly execute and consummate all of 
their securities transactions.\96\ As broker-dealers increasingly rely 
on electronic facilities, such as electronic mail and Internet web 
sites, to handle communications and transactions with their customers, 
they must have the facilities to handle the expected user volume.\97\ 
Broker-dealers should consider taking steps to maintain their 
operational capability during high-volume usage (such as when investors 
transmit electronic indications of interest to purchase securities in 
online IPOs), and high-volume and high-volatility trading days (such as 
the immediate aftermarket trading following an IPO).\98\
---------------------------------------------------------------------------

    \96\ See Exchange Act Release No. 8363 (July 29, 1968) [33 FR 
11150]. See also Exchange Act Release No. 15194 (Sept. 28, 1978) [43 
FR 46397]; Exchange Act Release No. 6778 (Apr. 16, 1962) [27 FR 
3991].
    \97\ See In the Matter of Lowell H. Listrom, 50 SEC 883, 887 n. 
7 (1992).
    \98\ See Division of Market Regulation Staff Legal Bulletin No. 
8 (Sept. 9, 1998), available on our Internet web site at http://www.sec.gov/rules/othern/slbmr8.htm>.
---------------------------------------------------------------------------

D. Technology Concepts

    Each technological advance brings changes to the structure of the 
capital markets and the securities industry. While we believe that the 
guidance provided in this release will be useful in the near term, we 
also recognize that we will need to reexamine our regulatory system and 
interpretive guidance as technology evolves. We will continue to 
examine and consider the removal of regulations that pose unnecessary 
barriers to electronic commerce and maintain those regulations that are 
essential to protect investors. In that regard, we request comment 
below on specific issues that may arise in the future in several areas. 
We also solicit comment on whether there are issues involving 
electronic media under the federal securities laws that we have not 
identified.
1. Access Equals Delivery
    Various commentators have suggested that additional regulatory 
changes may be warranted in the use of electronic media for delivery 
purposes. The 1995 Release stated that issuers and market 
intermediaries with delivery obligations would need to continue to make 
information available in paper form until such time as electronic media 
became more universally accessible and accepted.\99\ Some believe that 
this time has come and, therefore, that we should shift from the 
present delivery model to an ``access-equals-delivery'' model. Under 
the latter model, investors would be assumed to have access to the 
Internet, thereby allowing delivery to be accomplished solely by an 
issuer posting a document on the issuer's or a third-party's web site.
---------------------------------------------------------------------------

    \99\ See the 1995 Release, n. 11 above, at n. 16 and the 
accompanying text.
---------------------------------------------------------------------------

    We believe that the time for an ``access-equals-delivery'' model 
has not arrived yet. Internet access is more prevalent than in 1995, 
but many people in this country still do not enjoy the benefits of 
ready access to electronic media.\100\ Moreover, even investors who are 
online are unlikely to rely on the Internet as their sole means of 
obtaining information from issuers or intermediaries with delivery 
obligations.\101\ Some investors decline electronic delivery because 
they do not wish to review a large document on their computer screens. 
Others decline electronic delivery because of the time that it takes to 
download and print a document.
---------------------------------------------------------------------------

    \100\ See, for example, Richard S. Dunham, Across America, A 
Troubling ``Digital Divide,'' Bus. Wk., Aug. 2, 1999, at 40; 
Michelle Singletary, ``Digital Divide'' Isn't Just about Internet 
Access, The Wash. Post, Aug. 22, 1999, at H-1.
    \101\ See Andy Serwer, A Nation of Traders, Fortune, Oct. 11, 
1999, at 116, 120 (quoting Charles Schwab CEO David S. Pottruck as 
saying `` `[c]ustomers want a variety of [information] distribution 
channels * * * face to face, the mail, the telephone and the Web.' 
''). Additionally, the National Association of Securities Dealers, 
Inc. has recognized that the Internet is not sufficient to serve as 
the sole means of disseminating material corporate information. In 
January 1999, we issued an order granting approval of a rule change 
by the NASD that stipulated that the Internet may not be a 
substitute for the dissemination of corporate news to security 
holders through traditional news services. See Exchange Act Release 
No. 40988 (Jan. 28, 1999) [64 FR 5331]. In that release, we 
explained that ``[w]hile Nasdaq believes that it is generally in the 
public interest to encourage widespread dissemination of information 
to investors through the Internet, it also believes that it must 
maintain a level playing field for all investors, including those 
who do not have Internet access or who may not generally rely on the 
Internet as their primary source of material corporate news.''
---------------------------------------------------------------------------

    We request comment, however, as to whether there are circumstances 
in which, consistent with investor protection, an ``access-equals-
delivery'' model might be appropriate. How many U.S. households 
currently have Internet access? Is there data supporting the conclusion 
that most investors have access to the Internet? Similarly, is there 
data supporting the belief that investors who are online will rely on 
the Internet as their sole means of obtaining information from issuers 
or intermediaries? Assuming that this data exists, how will investors 
know when disclosure information has been posted on an issuer's web 
site? If we were to adopt an ``access-equals-delivery'' model, would we 
be creating a system that requires ownership of a late-model, 
sophisticated computer to participate in the securities markets?
    We also request comment on whether the disadvantages of electronic 
delivery, such as lengthy downloading time and system capacity 
limitations, are likely to be reduced or eliminated in the near future. 
Also, will documents delivered online be more readable in the future?
2. Electronic Notice
    The 1995 and 1996 Releases stated that notice of the availability 
of electronically delivered disclosure documents must be delivered 
directly to each investor. The 1995 Release further stated that notice 
on an Internet web site and otherwise by publication in a newspaper is 
insufficient to alert a consenting investor of the availability on a 
web site of a disclosure document.\102\
---------------------------------------------------------------------------

    \102\ See the 1995 Release, n. 11 above, at Ex. 24.
---------------------------------------------------------------------------

    We continue to believe that direct notice of the availability of 
electronic disclosure documents is necessary unless an issuer or market 
intermediary can otherwise establish that delivery has

[[Page 25854]]

been made. For example, a broker-dealer cannot meet its confirmation 
obligation under Exchange Act Rule 10b-10 \103\ by simply placing a 
notice on its web site that a customer must ``pull'' down to access. 
Rather, a Rule 10b-10 confirmation must be sent directly to the broker-
dealer's customer. Additionally, messages posted to an investor's 
account at his or her broker-dealer's web site regarding the 
availability of electronic disclosure documents are insufficient, 
unless they are promptly forwarded directly to the investor. We request 
comment, however, as to whether changes in the sophistication and 
expectations of Internet users as well as advances in Internet 
technology warrant re-evaluation of our position on whether account 
messages on an Internet web site provide sufficient notice. Were we to 
adopt such an approach, would it result in shifting the burden from 
issuers to notify security holders of the availability of electronic 
disclosure documents to security holders to search for material 
information? Would a burden shift be consistent with our investor 
protection mandate?
---------------------------------------------------------------------------

    \103\ 17 CFR 240.10b-10.
---------------------------------------------------------------------------

3. Implied Consent
    In lieu of ``access-equals-delivery,'' some commentators have 
argued for changes to our electronic delivery scheme, particularly with 
respect to investor consent to electronic delivery. We understand that 
obtaining investor consent poses the most significant barrier to the 
use of electronic delivery by issuers and market intermediaries.\104\ 
Some have suggested that electronic delivery would be more common if 
issuers and intermediaries with delivery obligations were permitted to 
use a form of implied consent to evidence satisfaction of delivery. 
Under an implied consent model, an issuer could rely on electronic 
delivery if investors do not affirmatively object when notified of the 
issuer's or intermediary's intention to deliver documents in an 
electronic format. Proponents of implied consent argue that the 
difficulties in obtaining investors' consents to electronic delivery 
result not from the unwillingness of investors to use an electronic 
medium, but rather from investors' inattention to requests for 
affirmative consent.
---------------------------------------------------------------------------

    \104\ See Alexander C. Gavis & Scott Maylander, Mutual Funds and 
Electronic Delivery: Promise Versus Reality, wallstreetlawyer.com, 
Feb. 1999, at 1.
---------------------------------------------------------------------------

    We are concerned that investors would be significantly and 
adversely affected by implied consent through their inadvertent failure 
to object. We understand that in many circumstances investors are not 
inattentive to requests for consent to electronic delivery, but rather, 
purposely do not consent.\105\ Thus, we generally believe that it would 
not be appropriate for issuers or intermediaries to rely on implied 
consent.\106\ We request comment, however, as to whether there are 
particular circumstances under which an implied consent model would be 
appropriate.\107\ For example, would it be appropriate where investors 
previously have provided an electronic mail address to an issuer or 
intermediary and have indicated that electronic mail is one of their 
methods of communication for investing purposes? How would the fact 
that investors sometimes change their electronic mail addresses affect 
an implied consent model?
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    \105\ For a discussion of the impediments to electronic 
delivery, see n. 101 above and the accompanying text.
    \106\ We set forth alternative procedures in the 1995 Release 
enabling an issuer to satisfy the evidence-of-delivery element 
without obtaining informed consent, but only where there is some 
other indication that the document was in fact received. See the 
1995 Release, n. 11 above. None of these procedures, however, 
permits an issuer or intermediary with delivery obligations to 
assume consent based upon an investor's inaction. In contrast, the 
1996 Release provided that an issuer could presume consent to 
electronic delivery by employee-security holders who use the 
electronic mail system ``in the ordinary course of performing their 
duties and ordinarily are expected to log-on to electronic mail 
routinely to receive mail and communications.'' See the 1996 
Release, n. 15 above, Ex. 1. This interpretation still stands, but 
we do not extend it to other situations.
    \107\ We recently adopted rules that allow issuers and broker-
dealers to rely on implied consent to ``householding'' of 
prospectuses and security holder reports; that is, delivery of a 
single prospectus or report to two or more investors that are 
members of the same family and share the same residential address. 
See Securities Act Release No. 7766 (Nov. 4, 1999) [64 FR 62540]. 
Under these rules, consent to householding can be implied only if 
adequate advance notice is given to the investors and they do not 
object. Due to concerns expressed by commentators, our rules permit 
householding to a shared electronic address only if the investors 
consent in writing. Id. We have proposed similar rules for delivery 
of proxy and information statements to households. See Securities 
Act Release No. 7767 (Nov. 4, 1999) [64 FR 62548].
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4. Electronic-Only Offerings
    The 1995 Release stated that, as a matter of policy, issuers and 
market intermediaries with delivery obligations would need to continue 
to deliver paper copies of documents that are required to be delivered 
until such time as electronic media becomes more universally accessible 
and accepted.\108\ This policy, however, does not preclude 
``electronic-only'' offerings. In an ``electronic-only'' offering, 
investors are permitted to participate only if they agree to accept 
electronic delivery of all documents in connection with the offering. 
The 1995 Release provided that an issuer could structure its offering 
as one that would be effected entirely through electronic media.\109\ 
Even in these offerings, however, an issuer or intermediary must 
provide the required documents in paper form if an investor revokes his 
or her consent before valid delivery is made. Additionally, the 1995 
and 1996 Releases both provided that a paper copy of information 
previously delivered electronically should be delivered whenever an 
investor so requests, even when the revocation is made after electronic 
delivery or there has been no revocation at all.\110\
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    \108\ See the 1995 Release, n. 11 above, at n. 16 and the 
accompanying text.
    \109\ Id. at n. 27. Companies conducting public offerings must 
consider prospectus delivery requirements for secondary market 
trading under Securities Act Rule 174, 17 CFR 230.174. Id.
    \110\ See the 1995 Release, n. 11 above, at n. 27 and the 
accompanying text and the 1996 Release, n. 15 above, at n. 17 and 
the accompanying text.
---------------------------------------------------------------------------

    Should the paper back-up system be required for offerings where 
participation is conditioned upon consent to electronic-only delivery? 
\111\ If not, would there be any adverse effects? Would we be creating 
a two-tiered system with access to some offerings available only to 
investors with Internet access? Should an issuer be permitted to 
require investors to pay for paper delivery when they have consented to 
electronic-only delivery? If the paper back-up system were no longer 
required, how should investors be advised of any payment requirement 
and any attendant risks? In the event of technical difficulties, how 
would issuers and intermediaries comply with their delivery 
obligations, other than by providing paper delivery? Should there be an 
exception to paper delivery where technological difficulties would 
prevent electronic delivery in a timely manner? What disclosures should 
be included in the notice to investors? If the paper back-up system 
were no longer required generally, are there any particular types of 
offerings, such as dividend reinvestment and direct stock purchase 
plans, or DRSPPs, where the paper back-up system should be retained?
---------------------------------------------------------------------------

    \111\ This could arise either when an issuer is conducting an 
electronic-only offering, or when an issuer is conducting a 
traditional offering, but certain members of the underwriting 
syndicate that are online brokers offer only electronic delivery.
---------------------------------------------------------------------------

    If the paper back-up system were no longer required for public 
offerings, how would issuers meet their prospectus delivery 
requirements for secondary market trading? \112\ Should an issuer be 
permitted to condition participation in offerings upon consent to 
electronic delivery of all required Exchange Act

[[Page 25855]]

reports? If not, should an issuer be required to obtain a separate 
consent from security holders in the newly public issuer in order to 
permit electronic-only delivery of required Exchange Act reports?
---------------------------------------------------------------------------

    \112\ See Securities Act Rule 174.
---------------------------------------------------------------------------

    For a mutual fund, would there be any potential adverse effects of 
limiting electronic-only offerings to investors who provide an 
irrevocable consent to electronic delivery of all future disclosure 
documents, including shareholder reports, proxy solicitation materials 
and prospectuses provided in connection with the purchase of additional 
fund shares?
5. Access to Historical Information
    One of the unique characteristics of the Internet is the continuous 
availability of information once it is posted on a web site. For 
example, a press release disseminated over a wire service or through 
other customary means is considered to have been ``issued'' once, and 
thereafter is not recirculated to the marketplace. The same press 
release posted on an issuer's web site potentially has a longer life 
because it provides a record that can be accessed by investors at any 
time and upon which investors potentially could rely when making an 
investment decision without independent verification. In effect, a 
statement may be considered to be ``republished'' each time that it is 
accessed by an investor or, for that matter, each day that it appears 
on the web site.
    Commentators have suggested that if a statement is deemed to be 
republished, it may potentially give rise to liability under Section 
10(b) of the Exchange Act and Rule 10b-5.\113\ We request comment on 
how to facilitate the availability of historical information on the 
Internet consistent with the federal securities laws. Additionally, how 
can technology help minimize investor confusion while providing for the 
accessibility of potentially useful information?
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    \113\ See, for example, Mary Lou Peters, Avoiding Securities Law 
Liability for a Company's Web Site, Insights, April 1999, at 16; 
Steven E. Bochner & Anita S. Presser, Corporate Disclosure in the 
Electronic Age: The Web Site--Opportunities and Pitfalls, 
wallstreetlawyer.com, Apr. 1998, at 1.
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6. Communications When in Registration
    Although we believe that our long-standing guidance on permissible 
communications is adequate to address many of the questions applicable 
to an issuer's web site content when in registration, we recognize that 
the Internet has spawned new types of businesses that do not easily fit 
within the existing disclosure framework. For example, many issuers not 
only use their web sites to conduct business through the Internet, 
their web sites are their businesses. In this instance, when an issuer 
is in registration, how should the issuer segregate its business 
activities from its offering activities? In other words, how can an 
issuer comply with its obligations under Section 5 of the Securities 
Act while maintaining communications to the marketplace related solely 
to its legitimate business activities?
    Are there special considerations for mutual funds because they 
continuously offer and sell their shares to the public and, therefore, 
always maintain effective registration statements? For a mutual fund 
that continuously offers its shares, what, if any, facts and 
circumstances should overcome the strong inference \114\ that 
hyperlinked information on a third-party web site that meets the 
definition of an ``offer to sell,'' ``offer for sale'' or ``offer'' 
under Section 2(a)(3) of the Securities Act is attributable to an 
issuer for purposes of anti-fraud liability?
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    \114\ See n. 66 above and the accompanying text.
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7. Internet Discussion Forums
    Another distinguishing characteristic of the Internet is its 
facility for interactive discussion. This discussion can, and does, 
cover virtually any subject, including issuers and their securities. In 
the corporate context, at least three different means of Internet 
``discussions'' have evolved. First, many web sites offer moderated 
discussion forums, typically led by a real-time moderator and featuring 
a guest ``expert.'' Other web sites contain ``bulletin boards,'' 
cyberspace message centers where comments concerning issuers, 
securities or industries can be posted and saved for viewing over an 
extended period of time. Finally, numerous web sites host discussion 
groups, or ``chat rooms,'' with real-time postings and viewing by 
participants on a wide variety of topics.
    These discussion forums present unique and often difficult problems 
for issuers.\115\ We request comment on any issues relating to Internet 
discussion forums. In particular, what effect, if any, do discussion 
group communications have on an issuer's stock price? In addition, 
should issuers or broker-dealers that host online discussion forums 
adopt and maintain ``best practices'' for participation in these 
forums? If so, who should establish these best practices, and what 
should be included in them?
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    \115\ See the Unger Report, n. 2 above, at 75.
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    Another area of significant concern involves the use of Internet 
discussion forums by an issuer's employees. Are issuers currently using 
specific procedures covering the use of electronic forms of 
communications by their employees? If so, what are these ``best 
practices''?

E. Examples

    A series of examples is provided below to illustrate various 
applications of the interpretations outlined in this release and to 
provide guidance in applying them to specific facts and circumstances. 
We note, however, that these examples are non-exclusive methods of ways 
to comply with the above interpretations. Additionally, the analysis 
required to determine compliance with the federal securities laws is 
fact-specific, and any different or additional facts might require a 
different conclusion. We request comment on whether other examples 
might be appropriate for publication.
    (1) Investor John Doe gives XYZ Delivery Service his informed 
consent over the telephone using automated touch tone instructions 
(after accessing the service using a personal identification 
number).\116\ The automated instructions informed John Doe of the 
manner, costs and risks of electronic delivery. The consent related to 
electronic delivery of documents. Before delivering any electronic 
documents to Investor John Doe, XYZ Delivery Service sends Investor 
John Doe a letter confirming that he had consented to electronic 
delivery.
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    \116\ This example and Example 2 represent alternative ways of 
recording a telephonic consent. These examples are not the only ways 
to comply with the interpretation.
---------------------------------------------------------------------------

    The confirming letter sent by XYZ Delivery Service provides 
assurance that John Doe consented to the same extent as if he had 
provided a written or electronic consent. Thus, XYZ Delivery Service's 
procedures would evidence satisfaction of delivery. We also note that 
XYZ Delivery Service has reason to be assured of the authenticity of 
John Doe's telephonic consent because of his use of a personal 
identification number.
    (2) In speaking with Broker DEF over the telephone, Investor Jane 
Doe (a long-term customer of Broker DEF) consents to electronic 
delivery to all future documents of Company XYZ on Company XYZ's 
Internet web site. Broker DEF agrees to notify Jane Doe by electronic 
mail (or other acceptable means of notification) that Company XYZ has 
posted the documents on its

[[Page 25856]]

web site when the posting occurs. Before obtaining Jane Doe's consent, 
Broker DEF advises Jane Doe that she may incur certain costs associated 
with delivery in this manner (for example, online time and printing) 
and possible risks (for example, system outages). Broker DEF also 
advises Jane Doe that the term of the consent is indefinite but that 
the consent can be revoked at any time. Broker DEF maintains a signed 
and dated memorandum in its files regarding the details of the 
conversation.
    In this situation, Jane Doe's consent would be informed regarding 
the manner, costs and risks of electronic delivery. We also note that 
Broker DEF has reason to be assured of the authenticity of Jane Doe's 
telephonic consent because Jane Doe is well known to Broker DEF.
    (3) In seeking a global consent to electronic delivery from 
Investor John Doe, Broker DEF specifies that the electronic media that 
may be used to deliver documents will be CD-ROM, an Internet web site, 
electronic mail or facsimile transmission, and further advises John Doe 
that if he does not have access to all of these media he should not 
consent to electronic delivery. John Doe consents to electronic 
delivery from Broker DEF.
    In this situation, John Doe's consent would be informed regarding 
the manner of electronic delivery. The consent need not specify which 
form of media a specific issuer may use.
    (4) Investor Jane Doe consents to delivery via a third-party 
delivery service's Internet web site of all future documents of Company 
ABC, Company XYZ and any additional companies in which she invests in 
the future. Jane Doe subsequently purchases securities of Company DEF. 
Thereafter, Company XYZ and Company DEF post their final prospectuses 
on the third-party web site and notify Jane Doe by electronic mail (or 
other acceptable means of notification) of the availability of the 
prospectuses. Company ABC does not post its prospectus on the third-
party web site but delivers a CD-ROM version of its prospectus.
    Company XYZ has satisfied its delivery obligations. Additionally, 
although not specifically identified in the consent, Company DEF has 
satisfied its delivery obligations because the consent covered delivery 
by companies added at a later date. Absent other factors indicating 
that Jane Doe actually accessed Company ABC's CD-ROM prospectus, 
however, Company ABC's procedure would not satisfy its delivery 
obligations because Jane Doe consented to delivery only by an Internet 
web site. If consent is to be relied upon, the consent must cover the 
specific electronic medium or media that may be used for delivery.
    (5) Investor John Doe consents to delivery of all future documents 
of Company XYZ electronically via Company XYZ's Internet web site, 
including documents delivered in PDF. The form of consent advises John 
Doe of the system requirements necessary for receipt of documents in 
PDF and cautions that downloading time may be slow. Company XYZ places 
its proxy soliciting materials and annual report to security holders in 
PDF on its Internet web site, with a hyperlink on the same screen 
enabling users to download a free copy of Adobe Acrobat (software 
permitting PDF viewing) and a toll-free telephone number that investors 
can use to contact someone during Company XYZ's business hours for 
technical assistance or to request a paper copy of a document.
    Company XYZ has satisfied its delivery obligations. Under these 
circumstances, John Doe can effectively access the information 
provided.
    (6) Company XYZ, which is engaged in a public offering of its 
securities, places its preliminary prospectus on its Internet web site. 
In the Business section of the prospectus, Company XYZ has placed a 
hyperlink to a report by a marketing research firm located on a third-
party web site regarding Company XYZ's industry.
    Because the hyperlink is embedded within the prospectus, the report 
becomes a part of the prospectus and must be filed with the Commission. 
In addition, Company XYZ must obtain a written consent from the person 
preparing the report in accordance with Securities Act Rule 436, 17 CFR 
230.436. This consent also must be filed with the Commission. Moreover, 
the report will be subject to liability under Section 11 of the 
Securities Act, as well as other anti-fraud provisions of the federal 
securities laws.
    (7) Company XYZ, which is engaged in a public offering of its 
securities, places its preliminary prospectus on its Internet web site. 
Each of the topics in the Table of Contents is a hyperlink, allowing 
investors to pick a topic and immediately be hyperlinked to the section 
in the prospectus relating to that topic.
    The hyperlinks present no federal securities law issues. The 
hyperlinks do no more than allow investors to turn electronically to a 
specific page in the prospectus.
    (8) Company XYZ, which is engaged in a public offering of its 
securities, places its preliminary prospectus on its Internet web site. 
Immediately following the button for the prospectus on the web site, 
Company XYZ offers investors the ability to download its financial 
statements in spreadsheet format. This financial information is not 
modified in any way from that contained in the filed document.
    The provision of financial statements in spreadsheet format would 
be permissible when the download results only in a mere difference in 
format without any difference in text. The completeness of the 
financial statements must not be compromised by any difference in the 
electronic version from the paper version.

III. Solicitation of Comment

    We invite anyone who is interested to submit written comments on 
this release. We request comment not only on the specific issues 
discussed in this release, but also on any other approaches or issues 
involved in facilitating the use of electronic media to further the 
disclosure purposes of the federal securities laws. We request comment 
from the point of view of both parties providing the disclosure, such 
as issuers and those acting on behalf of issuers, and parties receiving 
and using the disclosure, such as investors and security holders.

List of Subjects in 17 CFR Parts 231, 241 and 271

    Securities.

Amendment of the Code of Federal Regulations

    For the reasons set out in the preamble, Title 17 Chapter II of the 
Code of Federal Regulations is amended as set forth below:

PART 231--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT OF 
1933 AND GENERAL RULES AND REGULATIONS THEREUNDER

    1. Part 231 is amended by adding Release No. 33-7856 and the 
release date of April 28, 2000, to the list of interpretive releases.

PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES 
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

    2. Part 241 is amended by adding Release No. 34-42728 and the 
release date of April 28, 2000, to the list of interpretive releases.

[[Page 25857]]

PART 271--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 
COMPANY ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER

    3. Part 271 is amended by adding Release No. IC-24426 and the 
release date of April 28, 2000, to the list of interpretive releases.

    Dated: April 28, 2000.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-11079 Filed 5-3-00; 8:45 am]
BILLING CODE 8010-01-P