TIPS FOR AVOIDING INTERNET SECURITIES LIABILITY
By James Verdonik

You hear about an investment opportunity. What's the first thing you do to learn more about the company? For many investors, the answer is easy, CHECK OUT THE COMPANY'S WEBSITE.

In the pre-internet days, investors relied more often on brokers or investment advisers to gather and disseminate investment information. Now, much of the information investors know about a company is learned from the company's website. Investing today is a more direct process without the intervention of intermediaries. While this is a very efficient information distribution system, it also gives companies a greater opportunity to present information in ways that show the company in a favorable light. In most cases, this means that companies merely put a positive spin on information. In a small number of cases, companies move from spin to securities fraud.

This has led to substantial concern by the SEC about Internet abuses by companies and potential liabilities companies may have as a result of information investors obtain from their websites. In April 2000, the SEC issued a release that addresses some of the issues that are most relevant to deciding how to use websites to communicate with investors. This is the first major statement by the SEC about websites since 1995, when the Internet was in its infancy. Here are some of the SEC's words of wisdom about websites:

• If a company has filed for its IPO, embedding a hyperlink in the Prospectus causes the hyperlinked information to become part of the Prospectus. This means that if the hyperlinked information is false or misleading the company would have the same liability it would have were the hyperlinked information physically in the Prospectus. Therefore, a company that hyperlinks should carefully review ALL information that is hyperlinked. A company may desire to use a hyperlink to incorporate only a small amount of information, but it would have liability for all the information on the hyperlinked site.
• If a company merely posts its Prospectus on its website, the other information on the website does not automatically become part of the Prospectus merely because of proximity on the website.
  
• A company in registration must ensure that the information on its website is consistent with the information in the Prospectus filed with the SEC. You cannot make conservative disclosures in the Prospectus to protect against liabilities and then make contrary statements on your website to sell the deal.
  
• A company that hyperlinks analysts reports or other information can be liable for false or misleading statements in the hyperlinked information if the company endorses the hyperlinked information in its website. For example, if the company states that the hyperlinked information contains a good description of its business. Another form of endorsement can occur if the company selectively hyperlinks information that is positive about the company and fails to hyperlink negative information. Giving one hyperlink greater prominence than other hyperlinks may also result in potential liability for the content of hyperlinked information.
  
• Although it helps to avoid liability if its website clearly indicates that the hyperlinked information is not on the company's website (such as by having a screen state the viewer is leaving the company's website), or disclaiming responsibility for hyperlinked information, such statements will not avoid liability if the company has otherwise endorsed the hyperlinked information. The SEC believes many investors ignore routine disclaimers.
  
• A company that files for an IPO is entitled to continue to post business and financial information on its website if it has an established history of doing so. A company that adds such information to its website shortly before its IPO, however, may not post business and financial information.
  
• The SEC expressed concern that many websites that offer securities in private placements should register with the SEC as a broker dealer and questioned whether sufficient precautions are being taken to ensure that the websites are in fact dealing only with accredited investors. The SEC also questioned whether the operators of brokering websites have a sufficient business relationship with investors to play the traditional broker's role in private placements. These questions could cause companies that use these websites to raise capital to violate securities laws by not having a valid exemption from registration. In light of these concerns, the SEC is likely to consider restrictions on internet private placements.
  
• The SEC also indicated it intends to evaluate Internet investor discussion groups or chat rooms, including company sponsored chat rooms, and the participation of company employees in independent chat room discussions. What responsibility should companies have for statements made about their businesses in such forums? What constitutes endorsement by the company that results in liability?

It is clear that the SEC recognizes that the Internet is a powerful investor relations communication tool that is having a profound effect on investment decisions and that the SEC intends to pay more attention to how companies utilize the Internet to communicate with investors.

When was the last time you had your lawyer review your website?