Corporate web site disclosure and rule 10b-5: an empirical evaluation

Corporate web site disclosure and rule 10b-5: an empirical evaluation

New technology is revolutionizing a reveal.


New technology is revolutionizing the securities business(1) and, of necessity, the law of securities regulation as well.(2) As this article is written, the SEC is considering adoption of its proposed package of rules termed “the aircraft carrier.”(3) Because of its huge size, the “aircraft carrier” has the potential to change the face of securities regulation perhaps more than any single set of rule changes since 1933.(4) Numerous policy and historical factors provide the impetus for these proposed massive changes, many of which are technological in nature.(5) The aircraft carrier almost certainly will be adopted in some form. Even without it, however, because of the forces of technology securities regulation still will change dramatically in the next few years.

The SEC has responded to the implications of the Cyber revolution as adeptly as any federal agency.(6) It has promulgated many new rules, most of which relate to the raising of capital and related concerns governed by the Securities Act of 1933.(7) Beyond emphasizing that general antifraud provisions apply to disclosures made over the Internet,(8) the SEC has paid relatively little attention to the secondary markets and their regulation by the Securities Exchange Act of 1934.(9) Given the lack of specific SEC attention, various authors have written speculative pieces(10) hypothesizing about which methods of electronic disclosure, such as the Internet, companies might use and how various 1934 Act provisions would apply to those new uses.(11) Section 10(b) and accompanying Rule 10b-5 have received the most attention, for good reason.(12)

This article seeks to advance the discussion beyond the hypothetical by providing empirical evidence regarding the new types of corporate disclosures occurring over the Internet through the medium of the corporate Web site. It also analyzes these existing disclosure practices and their implications in light of the very real possibility that they can give rise to [sections] 10(b) liability.(13)

To be specific about this article’s goals, we first outline the general findings of our study of extant corporate Web site disclosure practices. Then, we briefly detail the basics of [sections] 10(b) and Rule 10b-5 as they currently apply to corporate disclosure practices generally. Finally, we address specific aspects of existing corporate Web site disclosure practices that our study uncovered which raise questions in terms of [sections] 10(b) and Rule 10b-5 liability. This discussion both analyzes the liability-creating potential of the practices and suggests liability-minimizing strategies.



The recent rapid development of the World Wide Web has provided a user-friendly, graphic-based platform from which companies, if they choose, may communicate with a large and growing number of financial information consumers, including shareholders and potential shareholders. What technology has made possible, companies have chosen to do, and for good reason. Although some believe the Internet may have its greatest impact on small companies by enhancing their ability to “get their story out” to investors,(14) large public corporations also have substantial motivation to utilize the Internet for corporate disclosure purposes. The number of investors now using the Internet to gain information for investment purposes is skyrocketing and cannot sensibly be ignored, even by the largest issuers.(15) Considerations of efficiency and economy also stimulate use of the Internet as a tool of corporate disclosure.(16) These factors are re-enforced by an SEC attitude which for some time has strongly encouraged public companies to use electronic media to disseminate information to investors and potential investors.(17)

Given these considerations, it should not be surprising that a June 1998 National Investor Relations Institute (NIRI) survey of senior investor relations personnel found that 82% of respondents reported using Web sites for corporate communications even though, as the survey noted, the Internet is “a communications tool that was in its infancy as recently as 1995.”(18) A 1997 survey by Straightline International reported similar results, finding that three of five public company Web sites included investor relations pages, up from one in three the previous year.(19) Carrying product and consumer information, as well as financial information, such sites, it has been predicted, may soon provide real-time financial data.(20)

Thus, public corporations increasingly are using the Internet to disclose corporate information.(21) This section seeks to provide a systematic look at which companies are using Web sites to disclose information and exactly what they are disclosing.

Sample, Industries, and Frequency of Web Sites

We drew our sample of corporate Web sites from two sources. First, we used companies rated by the Association for Investment Management and Research (AIMR). This group of 259 companies represents fifteen industries and permits some evaluation of the effect of industry membership on Web disclosure.(22) A disadvantage of the AIMR sample is that the companies tend to be consistently large and established firms. Therefore, we supplemented the AIMR companies with all members of the biotechnology (SIC 2836) and computer technology (SIC 3674) industries as defined by Standard & Poor’s 1997 Compustat database. In addition to representing industries not covered by the AIMR firms, these high-tech companies provided wider variation of company size and development stage.(23)

The distribution of firms across industries is provided in Table 1. Industries are listed in descending order of the percentage with Web sites. A total of 490 companies were included in the initial sample. Web sites were found for 402 (82%). This percentage is consistent with the NIRI survey results. Four industries had 100% representation on the Web: airlines, electrical equipment, health care and natural gas distribution. The industry with the lowest percentage of sites was environmental controls, with only 50%. The larger, more established AIMR firms had a higher percentage of Web sites than the high-tech firms, although the difference is only marginally significant (Pearson Chi-squared p=.076). Additional Chi-squared analysis also suggests that the existence of a Web site varies by industry (p=.000 for all industries, p=.003 considering only AIMR industries), although the low number of expected observations in some cells may affect the reliability of this result.


Sample and Industry Distribution

Total Firms Percent

Industry Firms With Sites with Sites

AIMR Firms:

Airlines 11 11 100%

Electrical Equipment 12 12 100%

Health Care/Pharmaceuticals 17 17 100%

Natural Gas 12 12 100%

Media 18 17 94%

Automotive 14 13 93%

Petroleum 20 18 90%

Retail Trade 26 22 85%

Food, Beverage & Tobacco 31 26 84%

Paper & Forest Products 27 22 81%

Insurance 28 22 79%

Railroad 8 6 75%

Homebuilding 11 8 73%

Precious Metals — Mining 12 8 67%

Environmental Controls 12 6 50%

AIMR subtotal 259 220 85%

Technology firms:(1)

Computer Technology 112 102 92%

Biotechnology 119 80 67%

Technology subtotal 231 182 79%

Total 490 402 82%

Industries are listed in descending order of Web site percentages.

(1) The Computer and Biotechnology industries include all companies identified by Compustat as belonging to SIC 3674 and SIC 2836 respectively.

Financial Data Items: Definition and Occurrence Levels

Next, we quantify the types of financial information presented at the Web sites. The authors and/or research assistants visited sites between February and May 1998.(24) Table 2 shows the list of financial data items used to evaluate each site. The list was developed from interviews with Investor Relations directors, review of NIRI literature, and preliminary site visits. It is intended to capture a broad range of financial disclosures that may be available at Web sites.


Financial Disclosure Items

Items Available Elsewhere

Annual report Complete annual report at site.

Current stock price Stock price updated (at least) daily.

DRIP Dividend reinvestment plan information.

Edgar link Link to the SEC Edgar site.

SEC Forms Actual SEC reports: 10-K, 10-Q, proxy, etc.

at site.

Stock data link Link to third-party provider such as Yahoo!

Finance or MSN investor.

Financial News Press releases for financing, earnings,


Historic stock price Past stock price(s).

Quarterly reports Abbreviated financial statements and

discussion of results. Usually

disseminated through wire services

Items Prepared or Adapted for Web Site


Advantage Discussion of advantages of holding stock

in the company.

Analyst Lists of, or links to analysts following

the company.

Annual report excerpt Portions of annual report (vs. complete

annual report).

Overview High-level charts or discussions of

financial performance.

Speech Transcripts or audio of IR or other officer


One set of items is relatively innocuous because the presence of these items at a Web site is merely an alternate dissemination channel, or another way for investors to obtain information previously or simultaneously released through traditional sources. According to legal analysts, the other set of items prepared or adapted for Web site presentation appears to present an incremental risk of liability.(25) We present descriptive statistics for both sets to provide a more complete picture of the financial information available at corporate Web sites and to develop a sense of the relative prevalence of the different types of information.

Items which fall into the innocuous category include stock price data (current, historical or link), SEC filings, links to the SEC EDGAR site, dividend reinvestment plan information, complete Annual Reports to shareholders,(26) financially-oriented press releases (e.g. financing agreements, stock splits, etc.), and Quarterly Reports. Quarterly Reports consist of a brief discussion of the previous quarter’s results and include condensed financial statements. They are generally disseminated as press releases.

The potentially riskier information items include excerpts from annual reports and high-level overviews, both of which may omit important information. Analyst links may incorporate the analyst’s opinion into the company’s set of disclosures for which it can potentially be held responsible. Speech transcripts may be subject to different “safe harbor” requirements than the actual speech. Finally, promoting stock ownership may risk charges of “touting” or “hyping.” All these implications will be explored in the last part of the article.

The various financial data items are sorted by frequency in Table 3.(27) The most common items were financial news releases (primarily earnings releases) found at 80% of the sites. Several items were found at approximately half of the sites: stock data links (57%), quarterly reports (54%), and Edgar links (50%). Complete annual reports and overviews were found at 45%.


Frequency of Disclosure Items

Item AIMR Firms Tech Firms All Firms

Percentage of sites at which item

is found

Financial news 82 77 80

Stock data link(1) 49 68 57

Quarterly Reports 58 51 54

Edgar link 49 51 50

Annual report(1) 55 32 45

Overview(1) 50 38 45

Dividend reinvestment(1) 36 3 21

Historic price(1) 27 14 21

Other SEC filings 19 17 18

A/R excerpts 19 15 17

Current price(1) 21 7 15

Analyst information(1) 10 21 15

Advantage(1) 20 5 14

Speech(1) 13 4 9

Items are sorted in descending order of frequency for all firms.

(1) Difference between AIMR and technology firms is significant (p [is less than or equal to] .05)

Another group of items was less common, found at 21% or fewer of all sites. This group included information about dividend reinvestment plans (DRIPs), historic stock prices, SEC filings, annual report excerpts, current stock prices, analyst information, discussions of the advantages of holding stock, and speeches. The relative frequency of these items was generally consistent with results of the Bochner & Presser survey,(28) although the disclosure items considered and sample compositions differ across studies.

The frequency data indicate that there were differences in the types of information provided by smaller, less established firms represented by the technology industry, and the larger, established firms represented by the AIMR portion of the sample. Chi-squared analysis indicates that the high-tech firms were more likely to include analyst information and links to stock data. AIMR firms were more likely to provide annual reports, overviews, historic and current stock prices, speeches, DRIP information, and discussions of the advantages of owning the firm’s stock.

In summary, the data indicate that there is great diversity in the financial items that are presented at corporate Web sites. These items vary widely in the frequency with which they are found, with industry, and with firm size. The next part of this article presents a summary of the liability rules governing corporate disclosure and a recent history of [sections] 10(b) jurisprudence in order both to highlight the importance of the topic discussed in this article and to establish a framework for the final part’s application of those rules to the specific types of Web site disclosure that are occurring.



The existence of federal securities antifraud rules in general, and most specifically of Section 10(b)(29) and accompanying Rule 10b-5(30) of the 1934 Act, makes the topic of this article particularly important. These rules impose obligations of accuracy and completeness, dictate content and timing of disclosure, and otherwise shape both formal and informal corporate disclosure of information.(31)

As noted above, the SEC has made it clear that its antifraud legal regime applies to all manner of electronic disclosure. There is little doubt that “the new technology poses the risk of getting into greater disclosure-related trouble than before.”(32) Indeed, the liability-producing potential of Internet disclosures now looms particularly significant in light of at least four facts. First, real lawsuits already have been filed based in part on Web site disclosures.(33) Second, plaintiffs’ attorneys now are combing corporate Web sites for material that might provide the basis for class action securities fraud suits.(34) One commentator has stated that Web sites often provide plaintiffs’ attorneys with “one-stop shopping in their search for incriminating evidence against potential defendants.”(35) Third, the new “aircraft carrier” proposals will move 1933 Act disclosure to a “company registration” basis for large companies which will, of necessity, move attention away from formal, “duediligenced” disclosures in registration statements and toward the sometimes less formal disclosures governed by the 1934 Act.(36) Finally, the changing population of financial information consumers also will justify increased SEC attention. A 1997 NASDAQ commissioned survey showed that the number of individual investors doubled over the previous seven years to include 43% of U.S. adults. The same survey indicated that the demographics of the investor population have changed dramatically: half do not have college degrees, and only 29% consider themselves managerial or professional. Thirty-seven percent of investors use the Internet to acquire information regularly.(37) These responses suggest that investors currently accessing Web sites to obtain financial information may possess a lesser level of financial sophistication than that previously assumed for the investing population. The widespread existence of successful Internet stock scares provides indirect support for this conclusion.(38)

If a corporation’s electronic disclosures are deemed to violate antifraud rules in this evolving and still-muddled area of the law, the consequences can be grave. The SEC, of course, has substantial authority to punish corporations and others who violate [sections] 10(b) and other disclosure provisions.(39) More ominous is the well-known private right of action whereby investors may bring class-action lawsuits for securities fraud against disclosing companies and their officials.(40)

Elements of a [sections] 10(b) Cause of Action

To establish that a corporation has violated [sections] 10(b), the SEC, or private plaintiffs suing for damages, must prove several elements broadly patterned after the common law fraud cause of action that existed in 1934.

First, the defendant corporation must have made a false or misleading statement or omission. A literally truthful statement may be deemed false if it makes up part of a “mosaic” of information conveying a misleading impression.(41) Complete omissions or half-truths also can mislead. Under certain circumstances, most especially when insider trading is occurring or past statements should be corrected or updated, a company’s silence can constitute fraud.(42)

Second, the false statement or omission must relate to a material matter, determined by whether there is a “substantial likelihood” that a misstated fact did significantly alter, or an omitted fact would have significantly altered, “the total mix of information made available” in the eyes of a reasonable investor.(43) In other words, an insignificant error, though perhaps creating a false statement, is not actionable.

Third, the false statement or omission cannot have been made innocently. Section 10(b) liability is predicated upon a showing of scienter, meaning that a defendant acted deliberately,(44) or at least recklessly.(45)

Fourth, plaintiffs other than the SEC must establish reliance,(46) at least in a case involving an affirmative misrepresentation.(47) Investors may establish reliance by proving that they saw, read, and relied upon the misleading document, or by establishing the predicates of alternative theories such as “fraud on the market,”(48) or, rarely, “fraud created the market.”(49)

Fifth, plaintiffs in [sections] 10(b) cases must prove causation of two types. Most courts require plaintiffs to first establish “transaction causation,” that it was the defendant’s omission or misrepresentation that caused them to enter into the transaction of which they complain. This is largely a restatement of the reliance element. More difficult for many plaintiffs to establish is “loss causation,” which requires plaintiffs to show that it was the defendant’s misrepresentations or omissions, and not other factors, that proximately caused their loss.(50)

Sixth, plaintiffs must show a purchase or sale that occurred in connection with the defendant’s fraud. A showing of a “purchase or sale” is necessary to establish standing.(51) Section 10(b) protects only those who have bought or sold securities, not those who think they might have had they not been misled. In cases involving public companies, the “in connection with” requirement generally means that plaintiffs must show that defendants made their misstatements or omissions in a setting reasonably calculated or reasonably expected to influence the investing public.(52) Because investors continually search the Internet seeking information helpful to their investment decisions, just about anything that a company posts on its corporate home page is likely to be deemed by courts to satisfy the “in connection with” requirement.

Seventh, private civil damages plaintiffs, although not the SEC, must prove damages when they bring a [sections] 10(b) action. These damages are limited to actual damages

Recent Developments in [sections] 10(b) Jurisprudence

Section 10(b) plaintiffs do not have an easy row to hoe. In addition to establishing the seven elements noted above, such plaintiffs must beat a relatively short statute of limitations in filing their suits.(55) Nonetheless, enough plaintiffs filed [sections] 10(b) class actions in the 1980s and early 1990s, and those cases carried sufficient settlement value, that many persons, including potential defendants such as high-tech companies and accounting firms, believed that a “litigation crisis” of major proportions existed.

One study showed, for example, that one-sixth of all venture-backed firms in operation between 1986 and 1994 had been sued at least once under a securities fraud theory, and that they had spent on average $692,000 in legal fees and 1,055 hours of management time per case defending those suits.(56) Others produced studies purporting to show that the “merits did not matter” when one examined the settlements in these class actions, supporting the conclusion that most are simply “strike suits” brought for purposes of coercing settlements from defendants fearing high litigation costs(57) and unpredictable juries.(58)

Although other studies persuasively undercut many of the arguments raised by critics of private securities class action litigation,(59) the critics gained the upper hand by extensive lobbying in Congress.(60) Ultimately, Congress overrode President Clinton’s veto and passed the Private Securities Litigation Reform Act of 1995 (PSLRA),(61) which imposed severe procedural limitations on federal securities class actions,(62) although it did little to directly affect the substantive elements of a securities law cause of action outlined above.(63) Because Congress concluded that plaintiffs’ attorneys were the primary instigators and beneficiaries of securities class action litigation, it inserted several provisions in the PSLRA designed to place large, institutional investors in control of such lawsuits and to minimize the profit to attorneys. Congress also concluded that suits, once filed, had significant settlement value due to the high costs of defending them. The PSLRA aimed to shift the balance of negotiating power from the plaintiffs, who supposedly easily could file a suit and then burden a non-settling defendant with exorbitantly expensive discovery requests, to the defendants. It did so, in part, by raising the standards plaintiffs had to meet to survive a motion to dismiss,(64) by automatically staying discovery in suits whenever a motion to dismiss was filed, and by providing a “safe harbor” from liability for projections and other forward-looking information not ultimately realized.(65)

Plaintiffs’ attorneys turned out to be a plucky lot, however. Although the number of federal class action securities lawsuits initially did decline following enactment of the PSLRA, plaintiffs’ attorneys sought to re-establish their prior bargaining strength by frequently filing parallel state court actions.(66) Although post-PSLRA defendants could stay federal discovery efforts by the mere filing of a motion to dismiss, such a motion had no effect on state court proceedings.

This state court maneuver caused the high-tech companies and accounting firms to troop back to Congress and induce passage of the Securities Litigation Uniform Standards Act of 1998 (SLUSA).(67) The SLUSA essentially preempts state court class action securities litigation so that most class action lawsuits will be governed by the pro-defendant provision of the PSLRA.(68) Unfortunately for potential securities fraud defendants, it is unlikely that passage of SLUSA will provide material assistance. Even before SLUSA was enacted, the filing of federal class action lawsuits, after declining in 1996, had risen in 1997 and again in 1998 and was proceeding at a higher pace than before passage of the PSLRA.(69) Experts predict that securities class action suit filings actually will continue to rise notwithstanding SLUSA.(70)

The bottom line message is that federal securities litigation is not going away anytime soon. Therefore, companies must take their disclosure obligations and their potential liability seriously. Electronic disclosures certainly must be considered in any evaluation of obligations and liabilities. The next part of the article examines specific existing electronic disclosure practices and their potential for creating liability.


Now that we have presented empirical findings regarding current Web site disclosure practices of public companies and spelled out [sections] 10(b) and Rule 10b-5 liability rules in broad outline, it is time to apply the liability principles to the known disclosure practices.

Low Risk Disclosures

Using a corporate Web site as an additional venue to disseminate previously released information should not in a significant way increase an issuer’s liability risk. We discuss these low risk disclosures here. Incremental risk is mainly associated with providing information only at Web sites, tailoring information specifically for Web sites, and incorporating third party representations via links or inclusion at the site. We discuss these higher risk disclosures in the next part.

Discussion of Empirical Findings

Our study’s empirical results indicate that, in general, the financial items most commonly presented at corporate Web sites were of relatively low risk.(71) The documents most often presented were duplicate presentations of items vetted for release elsewhere: press releases, quarterly reports, and annual reports. The links most frequently found were to innocuous sites: the SEC’s EDGAR site and stock price data.

The only potentially risky items noted among the relatively common items were high level overviews of financial performance (45% frequency). To the degree that this information is filtered and/or prepared specifically for Web site presentation, it may present an incremental risk of allegations of biased or inaccurate disclosure.

A continual tension exists between the informational advantages of posting financial and other data on corporate Web sites and concerns about pesky plaintiffs’ lawyers. The fact that most information posted on corporate Web sites tends to be of the low-risk, “old wine in a new bottle”-type indicates that litigation risk-aversion is a dominant motivation when corporations choose to disclose financial data over the Internet. This is consistent with received post-PSLRA wisdom that the Act’s safe harbors to encourage corporations to provide more forward-looking information to investors have not worked as well as Congress had hoped.(72)

Just as the substantial dangers of securities fraud liability and the unsure shield provided by court-created and legislatively-enacted safe harbors have combined to prevent corporations from being convinced that they should risk increasing their disclosure of forward-looking and other soft information in a post-PSLRA world, so the dangers of liability have led corporations to exercise caution when posting financial information to their corporate Web sites.

Legal Implications

That the predominant postings on corporate Web sites are of previously-disclosed information and therefore of relatively low marginal liability risk does not mean that they present no additional risk. Even if information has already been disclosed elsewhere, in at least three situations additional risk may arise from a posting on the corporate Web site.

First, disclaimers that appeared with the original publication may have been omitted when the information was posted on the Web site. In order to take advantage of the safe harbors contained in the PSLRA,(73) companies must label communications as forward-looking and accompany projections with specific, non-boilerplate qualifying language.(74) Companies may be careful to follow the PSLRA’s guidelines when issuing the original press release, but when that release is posted on the Web site, the cautionary language may be omitted and the safe harbor forfeited.(75)

Excerpted versions of annual reports are also susceptible to this problem. An example is Circuit City (see Exhibit A). Its on-line annual report included letters from the CEO and President with statements that may be considered forward-looking. However, we could not find at the site any express attempt to place the statements within the PSLRA safe harbor. There was a link to the original SEC filing at EDGAR. This document contained a safe harbor statement, but there was nothing to directly relate the statements at the Web site to it.

Even complete annual reports may pose a problem when posted in hyperlinked html format. The Mead site (see Exhibit B) contains a page discussing “expansion” that mentioned expectations for the future, although no safe harbor language is provided at that page. Additional searching finally located the warning on a page in a separate section of the annual report, but there was no reference or link from one page to the other. Nor was the cautionary language clearly labeled

Second, duties to correct and to update may be activated, even when otherwise innocuous data is posted to a Web site.(76) Obviously, companies may innocently post inaccurate historical information on their Web sites. When the companies learn of such errors, however, they come under a duty to correct the information.(77) Once they learn of the error, a knowing failure to correct can give rise to Section 10(b)/Rule 10b-5 liability.

Perhaps the original posting was a forecast of future performance, truly believed and reasonably based when made. Such a forecast, even if it does not pan out, will be protected by safe harbors such as the “bespeaks caution doctrine” as enunciated by the courts and as generally codified in the PSLRA. But once a company learns that its forecasts will not pan out, in order to be safe it must update them.(78) The duty to update lasts as long as the information is “alive,” that is, as long as reasonable investors might continue to rely upon it. A press release issued on January 1 will usually be reasonably viewed as expiring at some later point in the year. However, if the press release is still posted on the corporate Web site on December 31, it could be viewed as a signal to investors that the issuer still stands behind the statement and that the information contained therein, therefore, remains alive. To leave such outdated forward-looking information on the Web site, even though it was once believed in good faith and with reasonable grounds, again can provide the scienter necessary for a Section 10(b)/Rule 10b-5 violation once the forecast is no longer believed to be accurate.

Three methods of minimizing liability flow from the duty to update. First, regularly review corporate Web sites (e.g., once a week) for purposes of deleting and updating information as needed.(79) Second, post clear disclaimers upon all forward-looking documents along the lines of: “This statement speaks only as of the date of its original posting (or latest update) and the company is not responsible for any changes occurring after that date.”(80) Third, divide the Web site into “current” and “archival” sections with labels so clear that visitors could not be misled into thinking that outdated documents are still alive.(81)

Our study found examples of sites that used each of the three liability minimizing methods, as well as sites that used none. For example, consider the way in which airline industry companies present press releases. Of the nine airline sites with press releases, two provided archives for old releases, two provided disclaimers, two archived and disclaimed, one provided only recent releases (not more than three months old), and two posted old releases with no archive or warning. The four disclaimers varied in their prominence, title, and warnings. KLM Royal Dutch Airline’s was most obvious. Its Investor Relations (“IR”) link took the user directly to the “Legal Notices” page. The user then had to click on an “I Agree” button to continue to the IR section where the press releases (and other financial data) were provided. To find the disclaimers at the other three sites, the user had to follow links labeled either “Legal Notice” or “Copyright and Privacy Policy.” One link was located next to the link to the press releases, the other two links were found on the press release index pages. Only one warning specifically disclaimed a duty to update.(82) The other three warned that data was provided “as is” and “will change without notice.”

Speeches and presentations also are time-sensitive items. The Bochner & Presser study found that among high-tech companies that posted presentations or speeches on their Web sites, only one disclaimed a duty to update the posted information. Similarly, although our study found disclaimers of some sort at about 25% of sites with speeches, presentations or conference calls, only one of these disclaimers (Intel Corp.) specified that the company made “no commitment to update” the material.(83) Also, only two sites in our sample archived older speeches (based on calendar year).

Although this article primarily is concerned with antifraud liability as embodied in [sections] 10(b), a third incremental danger arising from disclosures of seemingly innocuous previously published information on a corporate Web site is that the very establishment of such a site could be viewed as illicit “gun-jumping.” Gun-jumping is an illegal attempt to precondition the market via unusual publicity for the company. If a company adds information to its Web site just before filing a registration statement with the SEC pursuant to the Securities Act of 1933, a gun-jumping violation arguably occurs.(84) Furthermore, companies contemplating registration should be cautious about creating hyperlinks to analysts’ reports, or even to a favorable media article about the company or its products. Such action could be viewed as attempting to illicitly precondition the market (during the prefiling period) or to provide improper supplemental selling literature to the market (during the prefiling and the waiting period).(85) If during the waiting period a company distributes anything in writing, including via the Internet, that is not a prospectus, it is violating [sections] 5 of the 1933 Act.(86)

Finally, launching a new Web site or putting substantial new material on a Web site during the immediate post-effective period could be viewed as undermining the intended primacy of the prospectus.(87) In response to this potential 1933 Act violation, some companies have segregated their prospectuses on completely separate Web sites with no hyperlinks to other materials in order to ensure that the prospectus is not overwhelmed by non-prospectus material posted on the main corporate Web site.(88) Because materials that are acceptable on a Web site during a non-offering period may not be acceptable during an offering period, companies should review the content of their Web sites when contemplating offerings.(89)

Among the companies in our sample with secondary equity offerings, we noted no examples of prospectus information at the Web sites, nor did we find separate Web sites containing such information. It is possible that prospectus Web sites are not registered with common search engines. The relevant corporate Web sites did post press releases announcing the planned equity offerings, but none referred the reader to Internet locations for additional information.

A bit of recent good news for issuers is that the aircraft carrier proposals would largely eliminate limits on delivering materials over the Internet that are not part of the prospectus.(90) This change would greatly clarify a murky area and give issuers much more freedom to disclose information on the Internet without worrying about whether they are about to launch an offering.

Higher Risk Disclosures

As noted above, our study found that corporate Web postings tend to include primarily relatively low-risk financial disclosures, typically the simple inclusion of financial information previously revealed elsewhere. However, our study uncovered several potentially risky disclosures among the less commonly provided information items. Annual report excerpts, analyst information, speeches by executives, and discussion of advantages of buying the company’s stock may pose incremental liability risks.(91) We discuss each separately.

Annual Report Excerpts

Empirical Findings

Excerpts from annual reports were found at 17% of all sites, including 25% or more of the sites for the electrical equipment, homebuilding, insurance, natural gas, paper/forest products, and precious metals industries. A traditional annual report includes management’s discussion of results, audited financial statements (income statement, balance sheet, statement of shareholders’ equity and cash flow statement), and related footnotes.(92) Table 4 summarizes the annual report components that were found at this subset of sixty-seven sites.(93) Again, the sections are listed in order of frequency.


Annual Report Excerpt Components: An Analysis of the 67 Sites with Excerpted “Annual Reports”

Percentage AIMR All

Percentage of sites that


Income statement 70 73 72

Balance sheet 70 60 64

Management discussion 48 55 52

5 or 10-year highlights 15 55 39

Cash flow statement 15 48 34

Selected f/s data 30 28 28

Shareholder’s equity 15 35 27

Footnotes 22 20 21

Auditor’s report 4 0 2

Sorted in descending order of overall frequency.

(1) Selected financial statement data includes excerpts of the income statement, balance sheet, cash flow statement or statement of shareholders’ equity for up to two years.

(2) Chi-squared indicates difference is significant at p [is less than or equal to] .10 level or better.

Excerpts usually included income statements (72%) and balance sheets (64%). But the other two “basic” statements were included at less than half of the sites (statement of cash flows: 34%

The majority of these excerpts were found under the simple heading “Annual Report.” Some companies included disclaimers warning that their “annual report” information was not complete. For example, Aetna (Exhibit C) explicitly stated that “[the annual report web page] does not include certain important sections ….” Honeywell (Exhibit D) noted that the information was “excerpted from the 1996 Honeywell Annual Report.” On the other hand, Ohio Casualty (Exhibit E) listed the sections of the annual report which were available, but did not mention that some portions were omitted.

The sixty-seven excerpt sites discussed here are sites at which excerpts were the only “annual report” provided. Anecdotally, we noticed that some sites presented excerpts for on-line viewing and also provided a separate, complete annual report in a downloadable file format. (e.g., Exhibit F: Baxter International) Such sites are not counted as “excerpt” sites in this study. However, to view the complete report, the user had to install additional software (usually Adobe Acrobat). In such a situation, any investor who does not access the complete annual report file is effectively viewing an excerpted annual report site.

Legal Implications

Viewers may be misled when a corporation omits from financial and other reports information needed to make the presentation complete.(95) Omitting footnotes may conceal information about off-balance sheet liabilities such as stock options and contingent liabilities.(96) Missing audit reports may obscure important information if the reports are modified to reflect a going concern qualification or other uncertainty about the company’s prospects. The extent to which viewers of the Web site may be misled is especially egregious where, as in some cases noted in our study, the Web site does not indicate that the financial statements presented are not complete.

Liability problems may arise even in Web sites where the issuer does specifically note that portions of the financial statements have been omitted. Although the omitted information is publicly available elsewhere, many Web users may not take the additional steps to obtain it. Thus, a site might provide historical information through balance sheets and/or income statements, but not include management’s discussion of future risks and expected challenges. If a clearly-labeled hyperlink is present that will take the viewer to the missing material, then it is unlikely that any investor could complain. However, if the missing material is available only if the viewer exerts what he or she might view as heroic measures (such as downloading Adobe Acrobat), a plausible argument can be made that disclosure is incomplete and misleading. If good news is much easier to access than bad news, investors again have a plausible claim that they have been misled.

Analysts’ Reports

Empirical Findings

Companies have extremely strong incentives to publish and distribute financial analysts’ positive reports.(97) Some types of analyst information (lists of analysts, links to analysts’ sites, and analysts’ reports on site) were found at 10% of the AIMR and 21% of the technology firm sites. The majority of these observations (about 87%) consisted only of lists of analysts who followed the firm. Usually it was not clear from the Web site whether the list was comprehensive, although a few sites included statements which implied that they might not be. For example, Trident Microsystems provided a list of analysts who “regularly follow and have issued reports on” the company.(98) We found only a few sites which had links to analysts’ reports (8% of all sites with analyst data) and even fewer (5%) with analyst reports’ on site. We also found two sites which provided summary buy/sell/hold analyst recommendations.

Statements specifically disclaiming responsibility for analyst opinions were identified at 33% of the analyst sites.(99) Nearly all of these disclaimers were posted on the same page as the analyst list. Only one required the user to follow a link to the warning. An additional 15% of the sites contained more general disclaimers, such as safe harbor statements or “data is provided as is.” None of these generic disclaimers were found near the analyst data. Rather, they were found at the initial investor relations page or by following links labeled “copyright” or “legal info.” Our overall disclaimer rate is somewhat higher than that found in the Bochner & Presser study where less than a third of corporate Web sites containing names and addresses of analysts accompanied the disclosure with any disclaimers or cautionary language.(100)

Legal Implications

The inclusion on a corporate Web site of analyst information raises multiple legal concerns, which may account for the relatively small percentages of Web sites containing such reports or links to them. Merely listing analysts who follow the company regularly, the most common form of disclosure, seems relatively innocuous. However, if a non-comprehensive list of analysts is presented at the site, liability may arise if analysts with negative perspectives are omitted. A company need not provide a list of analysts at all. However, if it provides a list containing the names only of analysts who have said positive things about the company and omits analysts who have said negative things, it is strongly arguable that the company has misled investors by omission.

To include analysts’ reports on the corporate Web site creates even more legal complications than simply listing the analysts’ names.(101) As an example, MDC Communications provided analyst reports on site (see Exhibit G). Companies that include these reports effectively may well adopt them as their own. Including analysts’ reports on Web sites is tantamount to handing written copies of those reports to investors. Many courts have held, and properly so, that when a company distributes an analyst’s report to investors, it effectively adopts that report as its own communication.(102) Shareholders who receive written reports of analysts from a company either by mail or by visiting the company’s Web site will reasonably conclude that the company believes the information contained therein or it would not be distributing it.

Because the companies now are responsible for the contents of the analyst reports, they will be liable for any errors they know, or are reckless in not knowing, are contained therein. If an analyst’s report contains financial forecasts that the company’s officers do not have reason to believe or do not in good faith believe, the company can be liable when those forecasts are not realized. These companies should not be liable for errors of which they have no reason to know, even though a jury, with the benefit of 20-20 hindsight, might conclude that the companies were reckless in not knowing.

Hyperlinks to analysts’ sites are even more problematic. The companies in our study that provided such links face at least two potential problems. First, such linking also will be construed as adopting the analysts’ reports as the companies’ own. Directing the user to “Click on this icon to go read the analyst’s report” is functionally equivalent to saying: “The analyst’s report is on that table. Pick it up and read it.” This is an adoption of the report and makes the company responsible for its contents, as the SEC has expressly noted.(103) Second, the contents at the far end of the hyperlink may be changed without notice to the company, yet the company remains responsible for the contents. To that extent, a company is safer actually posting the analyst’s report on its own Web site than providing a hyperlink.(104)

Any company home page which contains either analysts’ reports onsite or hyperlinks to such reports should contain explicit disclaimers indicating that the company provides the reports for informational purposes only and makes no representations regarding their accuracy. Such a disclaimer, if conspicuous and clearly worded, would probably provide protection from liability even in cases where the company’s officers knew that the analysts’ reports were inaccurate. However, some authors question whether such disclaimers would provide liability protection,(105) while others question whether they should provide such protection.(106)

Although our survey found analyst-specific disclaimers at 33% of the sites with analyst data (as mentioned above), none was at the sites that had links to analysts or analyst reports on-site. It appears that these companies were completely unaware of the legal risk associated with these practices. It also is interesting to note that sample companies using external consultants such as to support their financial pages never failed to include analyst-specific warnings. Companies employing were found entirely among the smaller, less-developed technology sample.(107)

Officer and Investor Relations Speeches

Empirical Findings

Transcripts of officer and/or investor relations personnel speeches and presentations were found at 9% of all sites, including 13% of the AIMR firms and 4% of the technology firms. All of these sites provided speeches in transcript form

Many firms simply omit cautionary language. The study performed by Bochner & Presser of high-tech companies in Silicon Valley found that 29% of corporate Web sites contained non-financial press releases with forward-looking information. However, less than half of these accompanied disclosure with any cautionary language,(108) and several of those disclaimers were merely boilerplate or generic in nature.

In addition to the 10% of the companies providing a duplicate audio version on-site, our study found disclaimers at 30% of the speech sites. Half of the disclaimers were specific in nature (e.g., safe harbor disclaimers), but the other half were more generic (e.g., “data is provided as is”).

The safe-harbor disclaimers were found in a variety of locations: on the first page of the speech/presentation (Unocal), on the index of speeches (Phillips Petroleum), or as a link from the speech index (Texas Instruments).

Legal Implications

Providing transcripts on a Web site may be a simple way to expand the audience for these corporate communications, previously available mainly to attendees of shareholders’ meetings or conferences with analysts. However, disclosure laws differ for oral and written communications. Assume that a CEO’s address contains forward-looking information. Under the PSLRA’s guidelines, the company can gain safe harbor protection for the CEO’s oral projections by simply stating that it is making a forward-looking statement, that actual results could differ, and that the reader can consult a readily-available written document for discussion of risk factors.(109)

If the company posts that speech on its Web site in written form, it runs the risk of losing the safe harbor because a more direct disclosure of risk factors is required when forward-looking statements are in written form. The risk factors must be disclosed in a communication that “accompanies” the forward-looking writing

No matter how the cautionary language is presented, it must be specific and meaningful to qualify for the PSLRA safe harbor. As noted above, mere generic, boilerplate disclaimers, as we found in a significant percentage of sites, are inadequate to establish a safe harbor under the PSLRA.(111) Only “meaningful cautionary statements” are sufficient to qualify for the safe harbor. This probably means that (a) the cautionary language must be specifically tailored to the forward-looking information, (b) risk disclosure should convey the existence of a specific risk and its magnitude, (c) warnings should be conspicuous, and (d) assumptions underlying specific forward-looking statements should be disclosed.(112)

Advantages of Purchasing Stock

Empirical Findings

Discussions of advantages of buying and holding the company’s stock were found at 20% of AIMR sites and 5% of technology sites. The discussions generally were based on data such as evidence of historical increases in stock value or consistent dividend histories. For example, Intel provided a graph showing that $100 invested in Intel stock in its IPO would have purchased stock at the end of 1997 worth $101,250. This page also included small print which noted that “past performance does not guarantee future results.”(113) As another example, Lowe’s “proves the value” of holding its stock and gave support for “recording new highs in 1997” (see Exhibit H).

Although the Internet only recently became a potential avenue for direct stock-purchase programs, approximately 500 companies currently offer such programs.(114) This is a growing trend with many Fortune 500 companies planning to take advantage of the Internet’s convenience and potential cost savings.(115) A typical means of so doing is to hyperlink from the issuer’s home page to a company that specializes in such direct stock-purchase programs. For example, Ford Motor Corporation(116) links to DirectService Investment and Stock Purchase Program’s site,(117) a direct purchase service operated by Ford’s shareholders services and transfer agent, First Chicago Trust Co. of New York.(118) Other offerings which minimize shareholder transactions costs and corporate cash costs are dividend reinvestment plans (DRIPs). DRIPs allow investors to automatically roll dividends into additional shares of the company’s stock. Information about this possibility was provided at 21% of all the sample sites.

Legal Implications

Companies that directly hype their stock are inviting a [sections] 10(b) lawsuit if they recklessly exaggerate the company’s past performance, current financial status, or future prospects. Some have noted that excessive hype “will be marginally easier to defend if it appears in a section focussed on product marketing (as to which courts have granted companies some leeway) than if it is pitched to investors.”(119) Although a few courts have refused to allow securities fraud suits based on product misrepresentations to proceed,(120) in many jurisdictions ample precedent exists for doing so.(121) Because statements regarding products can affect a company’s share price, intentionally false product statements generally are actionable under [sections] 10(b).

Although such action might not be successful in warding off [sections] 10(b) litigation springing from overly zealous product claims appearing on a Web site, it seems reasonable that companies should segregate their Web sites so that product claims are not intermixed. This would enable companies to argue that their product hype was not meant to influence investors. Indeed, several companies have set up their Web sites so as to segregate product information from investor information.(122) As mentioned in a previous footnote, the majority of the companies in our sample provided financial data under the heading “Investor Relations” or “Shareholder Services.”(123) However, some companies scattered financial information under several different links. For example, Burlington’s earnings reports were found under News Releases while its annual report was located separately at Investor Relations. At Louisiana Pacific, the Chairman’s Letter (excerpted from the annual report) was found under “Corporate Growth.” Other financial information was found by following the links to “Headquarters” and “Financial Information” for additional excerpts from the annual report, or “News and Press Releases” for quarterly earnings and other financial events.

One may legitimately wonder if companies hyping their own stock on their Web sites are gaining advantages commensurate with the litigation risk. If the company is simply trying to encourage purchases on the secondary market, none of the proceeds will go into company coffers. Certainly it is better, all things being equal, to have greater demand for your company’s stock rather than a lesser demand, and a higher stock price rather than a lower stock price. But [sections] 10(b) litigation can quickly neutralize those benefits.

If the company is trying to hype stock it is selling in a primary offering, the gains are greater because the proceeds go directly into company coffers. However, the risks are greater as well, for the liability provisions of [sections] 10(b) of the 1934 Act, supplemented by [sections] 11(124) and [sections] 12(a)(2)(125) of the 1933 Act, are available to remedy inaccurate statements.

As one commentator recently noted, “[c]ompanies should also avoid making statements in their home page that amount to solicitations to buy company stock. Statements such as `Now is the time to buy’ or `Our stock is grossly undervalued’ are just as problematic when contained in a home page” as when contained in a non-electronic format.(126)

Even if the company’s statements regarding its stock and its performance are completely accurate, if it is engaged in a making a “sale,” a [sections] 10 (of the 1933 Act) registration statement should be filed. In addition, the entire set of 1933 Act rules and regulations previously discussed come into effect, threatening to give rise to liability under its provisions as well as [sections] 10(b). For example, saying “now is the time to buy” clearly constitutes an “offer to sell” under [sections] 5 of the 1933 Act. But the working definition of “offer to sell” under 1933 Act case law includes any communication calculated to “arouse,” “stimulate,” and “elicit” investor interest and “thereby set in motion the processes of distribution.”(127) Many types of statements posted on a corporate Web site, including statements about products, could meet that broad definition.

If the company is (or should be) conducting a registered offering, then it faces all the problems noted above(128) regarding “gun-jumping” in the pre-filing period. The same Web site material that could be viewed as “gun-jumping” during the pre-filing period could be held to constitute illicit “free writing” material in the waiting period. As two commentators recently noted, “[t]he current view is that Web site information may constitute an illegal prospectus during the pendency of a registration statement…. [I]ssuers are counseled to avoid hyperlinks to a preliminary prospectus, and fictions of an `electronic envelope’ are concocted to make sure that the preliminary prospectus is `sealed’ from the issuer’s Web site.”(129) Also, as noted previously, the Web site material, if too elaborate, could be viewed as improperly displacing the final prospectus in the post-effective period.

In addition, if a company is trying to sell its shares pursuant to an exempt offering, it runs the risk that information about the offering contained on its Web site constitutes a “general solicitation” that would invalidate an exemption under Regulation D.(130) The SEC has indicated that the posting of notices about exempt offerings on an issuer’s Web site, in fact, does constitute a general solicitation prohibited for Rule 505 and 506 offerings.(131) Such a violation would be actionable under [sections] 12(a)(2) of the 1933 Act.(132)


Previous writing has speculated that companies might employ Web site disclosure practices that incrementally increase corporate liability risk. Our study reviewed the contents of over 400 corporate Web sites to determine whether such potentially risky practices are extant on the Internet, and if so, to what degree.

Our statistics indicate that the most frequently presented items (found on at least 45% of the sites) are documents vetted for presentation elsewhere: financial press releases, quarterly reports and annual reports, or links to stock price information and the SEC EDGAR database. In other words, the more commonly found items appear to be fairly innocuous.

However, Web site arrangements which may court additional liability also were identified, albeit with lesser frequency. Some of these potentially troublesome practices are due to the nature of the information provided

a. Partial annual reports were found at 17% of the sites. Tailoring the annual report information for presentation at Web sites by omitting crucial information and/or disclaimers included in the original document clearly runs the risk of misleading investors and creating potential [sections] 10(b) liability. It is unclear whether links to EDGAR or warnings that the “annual report” is incomplete are sufficient to prevent successful litigation (assuming they are provided, which was not always the case).

b. Analyst information was found at 15% of sites. Usually the information consisted of lists of analysts. Assuming that the list is not biased towards favorable analysts, these lists may not be risky. However, a few companies included links to the analysts’ sites or provided analysts’ reports on site, potentially making the company responsible for the analysts’ statements and forecasts. Furthermore, only a third of these companies provided accompanying disclaimers specifying that the company did not endorse the opinions of the analysts.

c. Transcripts of officers’ speeches were found at 9% of the sites. These speeches often included forward-looking statements. Because it is easier to invoke safe harbor protection for oral than written communications, a speech that effectively may have invoked safe harbor protection when delivered may not carry the protection over into written format.

d. Otherwise innocuous items such as press releases can become a risk if kept “alive” too long at a Web site. Liability-limiting practices such as disclaiming a duty to update or purging or archiving old items were inconsistently applied by our sample companies.

e. Missing disclaimers or warnings have been mentioned in each of the points above. The most common disclaimers found in our sample were not specific to any financial information at the site and were accessed via a “small print” link to “copyright information” or “legal information” from the main home page, not from specific financial documents. Currently it is unclear exactly what it means for a disclaimer to “accompany” a disclosure in the context of a corporate web site, but companies should err on the side of caution.

The dramatic arrival of the Internet as an information dissemination medium has created many gray areas and uncertainties about the application of existing securities laws to corporate Web sites. How all these issues will be resolved is currently unknown. To avoid becoming a test case, companies must be careful. After all, the investors who visit company sites to obtain convenient financial information may become the plaintiffs who return to find evidence.

Exhibit A: Circuit City

Letters with forward looking statements were excerpted from the Annual Report, but a sate harbor provision could not be found at the site.


Exhibit B: Mead Corporation

Forward looking statements regarding “expansion” are not accompanied by safe harbor language on this page. Safe harbor warnings can be found only by following the “Financial Statements” link to the “Financial Review” page, where in be found near the end of the discussion.



Aetna’s “Annual Report” included only “selected financial data.” Aetna did provide a warning that the “important sections are “not included.”


EXHIBIT D: Honeywell

Honeywell’s “Annual Report” omitted the footnotes. A note at the bottom of the excerpted income statement referred the reader to the complete annual report.


EXHIBIT E: Ohio Casualty

Ohio Casualty’s excerpted version of its “Annual Report” did not mention that the management discussion, footnotes or auditors report had been omitted.


EXHIBIT F: Baxter International

Baxter’s “Annual Report” included selected sections (Letter to Shareholders, 1997 highlights, Five-year summary of selected data). Baxter also provided a link to obtain Adobe Acrobat software so that electronic copies of the complete annual report could be downloaded and viewed off-line.


EXHIBIT G: MDC Communications

MDC Communications provided analysts reports on site.



Lowe’s provided a comparison of the current price of its stock to its price in 1961 to “prove the value” of an investment in Lowe’s.


(1) SEC Chairman Levitt recently noted that “[f]ew sectors of our economy use technology in more sophisticated ways than the securities industry.” Arthur Levitt, Corporate Finance in the Information Age, in SECURITIES LAW & THE INTERNET 142 (1998). And not long ago, SEC Commissioner Wallman predicted that “[t]echnology-initiated change will come, it will come quickly, and it will have dramatic effects on the securities industry.” Steven M.H. Wallman, Regulation for a New World, BUS. L. TODAY, Nov./Dec. 1996, at 8, 10.

Evidence indicating that Levitt and Wallman are correct is plentiful. First, trades placed over the Internet have risen from nonexistent a few short years ago to around 25% of all individual investor stock transactions today. They rose from virtually none before 1996 to slightly under 100,000 per day at the beginning of 1997 to more than 200,000 per day by mid-1998. See Rebecca Buckman, Online Trading Holds Up in Downturn In Market, but Growth May Be Slowing, WALL ST. J., Oct. 22, 1998, at C1 (citing numbers provided by Credit Suisse First Boston). Just between September and mid-December of 1998, such trades jumped again to 350,000 per day. See Online Trading Increases 30% Since September, AUSTIN AM.-STATESMAN, Dec. 19, 1998, at G1. Approximately three million investors now have on-line brokerage accounts. See Amy Harmon, Have Laptop, Will Track Each Blip in the Market, N.Y. TIMES, Sept. 6, 1998, at BU7. Competition has caused online trading commissions to drop like a stone. See Suzanne Woolley, Do I Hear Two Bits a Trade?, BUS. WK., Dec. 8, 1997, at 112.

Second, alternative electronic trading systems now handle approximately 20% of NASDAQ’s volume and 4% of the NYSE’s volume, again up from zero just a few years ago. See Rebecca Buckman, On-Line Firms Study Network For Trading, WALL ST. J., Aug. 20, 1998, at C1, C15.

Third, in 1996, there were only about 20 on-line brokerage firms. That number is now over 80. See Rebecca Buckman, Comparison Shopping, WALL ST. J., Sept. 8, 1998, at R8. Surprisingly, the stock value of online specialist Charles Schwab Corp. passed that of Merrill Lynch & Co. in late 1998. See Rebecca Buckman, Milestones Hit by Schwab And E*Trade, WALL ST. J., Dec. 29, 1998, at C1 (noting also that on-line broker E*Trade had more than 540,000 paying customers).

Fourth, the volume of Internet investing has forced traditional brokerage firms like Merrill Lynch & Co. to eat their anti-Internet rhetoric and set up their own online service offerings. See Rebecca Buckman, More Old-Line Brokers Test Waters Online, WALL ST. J., Jan. 6, 1999, at C1.

(2) See John C. Coffee, Jr., Brave New World?: The Impact(s) of the Internet on Modern Securities Regulation, 52 BUS. LAW. 1195, 1195 (1997) (“It is now a trite commonplace that the advent of the Internet will in time revolutionize securities regulation.”)

(3) Securities and Exchange Commission, The Regulation of Securities Offerings, SEC Rel. No. 33-7606, 1998 SEC LEXIS 2863 (Nov. 3, 1998).

(4) The Commissioner of the SEC has stated that these proposed changes are “broader in scope than what has ever been ventured in this area before.” Paul, Weiss, Rifkind, Wharton & Garrison, SEC Proposes Major Overhaul of the Offering Process–A Summary for Non-U.S. Issuers, MONDAQ BUS. BRIEFING, Nov. 20, 1998, available in LEXIS, News Library, Allnws File (quoting Arthur Levitt).

(5) See SEC Proposes Loosening Quiet Period Restrictions, FIN.NETNEWS, Oct. 19, 1998, at 7, available in LEXIS, News Library, Allnws File (quoting attorney Ottilie Jarmel as stating that “[t]he Comission repeatedly cited developments in technology as a major impetus for [the aircraft carrier] reform[s]….”).

As just one example, the “aircraft carrier” would eliminate the requirement that issuers file no-action requests with the SEC in order to conduct electronic “road shows” when promoting an offering. As one commentator noted, this change is “part of the SEC’s attempt to acknowledge the new technologies and its [sic] impact on the communications process.” New Rules Would End Road Show No-Action Requests, FIN. NETNEWS, Nov. 23, 1998, available in LEXIS, News Library, Allnws File (quoting Michael Wheeler, president of CNBC/Dow Jones Business Video).

(6) See Hal Lux, SIA Urges Coordinated Action on Internet-Related Issues, INVESTMENT DEALERS DIG., Dec. 11, 1995, at 4 (“The Securities Industry Association is applauding Internet-friendly actions by the Securities and Exchange Commission.”)

(7) Most prominently, the SEC has approved rules allowing electronic delivery of mandatory disclosure documents that formerly had to be snail-mailed to investors and others. See, e.g., Use of Electronic Media for Delivery Purposes, Securities Act Release No. 7233

For a recent and comprehensive summary of SEC actions to accommodate the Internet and other new technologies, see Jane Kaufman Winn, Regulating the Use of the Internet in Securities Markets, 54 BUS. LAW. 443 (1998).

(8) The SEC has stated:

The liability provisions of the federal securities laws apply equally to

electronic and paper-based media. For instance, the antifraud provisions of

the federal securities as set forth in Section 10(b) and Rule 10b-5

thereunder would apply to any information delivered electronically, as it

does [sic] to information delivered in paper.

Use of Electronic Media for Delivery Purposes, Securities Act Release No. 7233

(9) One commentator has mildly criticized the SEC for issuing “a thicket of nearly 50 no-action letters, releases, proposed rules, notices, information memoranda, reports and `non-binding’ letters intended to give guidance on using the Internet without violating federal securities laws” instead of issuing clear general guidelines. Blake A. Bell, Corporate Web Sites and Securities Offerings, N.Y.L.J., May 21, 1998, at 5.

(10) Such speculation has been necessary because there has been and remains virtually no Internet-specific case law in the securities field.

(11) See Bell, supra note 9, at 5

(12) Section 10(b) and Rule 10b-5 are the most important securities antifraud provisions in the world. See J. ROBERT BROWN, JR., THE REGULATION OF CORPORATE DISCLOSURE 2-30 (2d ed., 1995) (“Without a doubt, Rule 10b-5 quickly became the most significant antifraud provision.”). Recent passage of the Securities Litigation Uniform Standards Act, discussed infra notes 67-70 and accompanying text, reduces the importance of state securities law, makes federal law the new national standard for securities litigation and, therefore, makes [sections] 10(b) even more important. See David M. Levine & Adam C. Pritchard, The Securities Litigation Uniform Standards Act of 1998: The Sun Sets on California’s Blue Sky Laws, 54 BUS. LAW. 1, 32 (1998) (summarizing the Act’s provisions).

(13) HOWARD M. FRIEDMAN, SECURITIES REGULATION IN CYBERSPACE xix (1997) (“[L]iability under the securities law potentially exists in connection with misstatements or omissions anywhere on the user’s site.”).

(14) See Stephen J. Choi, Gatekeepers and the Internet: Rethinking the Regulation of Small Business Capital Formation, 2 J. SMALL & EMERGING BUS. L. 27, 36 (1998) (noting that the Internet will “have its greatest impact on raising small company price efficiency”).

On the other hand, it has been forcefully argued that the Internet will not significantly reduce the costs of capital-raising for small companies because it cannot solve problems of information asymmetry faced by investors seeking to invest in smaller ventures. See Bernard S. Black, Information Asymmetry, The Internet, and Securities Offerings, 2 J. SMALL & EMERGING BUS. L. 91, 99 (1998) (“The Internet can transmit to investors `first-level’ information about the company’s operations, but not `second level’ information about the quality of the first-level information.”).

(15) As just a modest example, when a relatively small information-technology firm recently changed its trading symbol on the ticker-quote beards, its trading volume plunged by two-thirds and its stock price skidded by more than 5% for the simple reason that it underestimated the amount of e-trading that occurs. Many electronic sites that small investors used were not equipped to link the company’s former symbol to its new one, causing quite a disruption in the company’s trading. See Robert L. Simison, CBSL Dubs Itself CBSI, Drops Off the Screen for Cyber. Traders, WALL ST. J., Sept. 17, 1998, at B1.

(16) As Bochner and Presser have noted:

A web site provides companies with a low cost means of disseminating information to a wide audience of current and potential investors and analysts. Information posted on a web site also reaches the public faster and is easier to update, search, organize and analyze than a written communication. Further, information distributed via a web site allows small and large investors equal access to information, and small and large companies equal ability to widely disseminate information.

Bochner & Presser, supra note 11, at 13.

Feldman and Salceda have described similar advantages of Web site disclosures. See Feldman & Salceda, supra note 11, at 5-9 to 5-10.

(17) See Maryann Wahyjas, Cyberspace Offers a New Medium for SEC Filings, NAT’L L. J., Dec. 18, 1995, at B10 (“The SEC recently has expressed strong support for public companies that seek to use electronic media to communicate with investors and is encouraging even further technological research, development and application of such electronic media.”).

(18) National Investor Relations Institute (NIRI), NIRI survey finds significant improvements in corporate disclosure practices among U.S. companies

(19) See, e.g., Alexander C. Gavis, The Offering and Distribution of Securities in Cyberspace: A Review of Regulatory and Industry Initiatives, 52 BUS. LAW. 317, 320-21 (1996) (noting early wave of corporate establishment of Web sites)

(20) See Dominic Bencivenga, Investors Push for Real-Time Data on Internet, N.Y.L.J., May 7, 1998, available at <>. However, the Web sites in the current study were initially examined for real-time accounting data. The most “recent” data identified were monthly sales revenues. These observations were limited to the Media and Retail industries and were so rare (at only 3% of all sites) that they were not considered further. Thus, it seems that the presentation of real-time financial accounting data may not be as imminent as is often predicted.

(21) See Richard J. Koreto, When the Bottom Line is Online, J. ACCT., Mar. 1997, at 63 (surveying various selected sites).

(22) Industries are defined by AIMR. The petroleum industry includes both international and domestic firms.

(23) T-tests of company size, measured by the natural log of market value of equity at December 1996 for companies with available market data (n=465), show that AIMR firms are significantly larger than technology firms (t=22.484).

(24) All examples and exhibits were valid during this period. Because of the rapid evolution of Web use, specific companies may have changed their disclosure practices. However, in the absence of standards and regulation, it is likely that examples of each of the disclosure practices depicted here persist.

(25) See Feldman & Salceda, supra note 11, at 5-14 (suggesting that the most risk-averse course for Web site disclosure is to post only already-released documents).

(26) Annual Reports may be filed with the SEC and incorporated by reference into Form 10-K filings, but if Form 10-K contains all required information, a company need not file an Annual Report.

(27) Frequency is the percentage of sites at which the item was found.

(28) See Bochner & Presser, supra note 11, at 19.

(29) 15 U.S.C. [sections] 78j(b) (1994) [hereinafter [sections] Sec. 10(b)]. This section provides:

It shall be unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange … to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.


(30) 17 C.F.R. [sections] 250.10b-5 (1997) [hereinafter Rule 10b-5]. This rule provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.


(31) See BROWN, supra note 12, at vii – viii.

(32) Feldman & Salceda, supra note 11, at 5-3.

(33) See, e.g., amended Complaint, Howard Gunty v. Quantum Corp., No. CV760370 (Cal. Super. Ct. Santa Clara Cty., Mar. 20, 1997).

(34) See Micalyn S. Harris, Managing Web Site Risks Effectively, WALLSTREET LAWYER.COM, June 1997, at 12, 13 (“When a company’s stock price plummets unexpectedly, plaintiffs’ counsel in such suits is likely to scrutinize the allegedly offending company’s web site for misleading or inadequate information.”)

And there may be ample fodder contained in financial documents contained on the Web site, for the SEC is increasingly concerned with the adequacy and accuracy of financial reporting by U.S. companies. See Elizabeth MacDonald, SEC’s Levitt Pushes Harder for Changes In Fiscal Reporting, and Some Cry Foul, WALL ST. J., Nov. 17, 1998, at A2 (noting SEC concerns that companies increasingly are manipulating their earnings figures).

(35) Bochner & Presser, supra note 11, at 14

(36) Under the proposals contained in the aircraft carrier, larger issuers would no longer have to file the traditional due-diligenced prospectus before holding a public offering. To compensate for the lack of a filed registration statement, the SEC plans to require more thorough disclosures under the 1934 Securities Exchange Act’s continual reporting requirements. See generally SEC Proposes Major Reforms to Boost Capital Formation Process, BNA SECURITIES LAW DAILY, Oct. 16, 1998, available in LEXIS, News Library, Allnws File (summarizing these provisions of the aircraft carrier).

(37) See NASDAQ Stock Market Inc., Peter D. Hart Research Associates Shareholder Survey, Feb. 21, 1997, available at <http//>. To look at it another way, approximately 14% of computer users who have Internet connections use those connections to access investment information and/or trade securities while online. See John E. Lewison et al., Cyberspace Investing, 182 J. ACCT. 63 (July 1996).

Such usage is sensible, given the vast resources of relevant information that are available on the Web. Financial columnists often pen columns listing their favorite Web sites containing information useful to investors. See, e.g., Edward C. Baig, For Investors of All Stripes, A Cornucopia on the Net, BUS. WK., Dec. 22, 1997, at 104 (noting the “wealth of Web material … aimed at seasoned day traders, tyros, and just about every investor in between”)

(38) Thus, the Internet does not present an unalloyed benefit for investors. See, e.g., Jill E. Fisch, Can Internet Offerings Bridge the Small Business Capital Barrier?, 2 J. SMALL & EMERGING BUS. L. 57, 58 (1998) (“The low cost and wide distribution of internet offerings makes the internet an easy vehicle for fraudulent securities transactions.”). By mid-1998, the SEC had already launched about 30 Internet-related enforcement actions. See Rebecca Buckman, SEC Formalizes Focus on Internet With New Office, WALL ST. J., July 29, 1998, at B5. For a summary of several of those actions, see Joseph J. Cella III & John Reed Stark, SEC Enforcement and the Internet: Meeting the Challenge of the Next Millennium, 52 Bus. LAW. 815, 837-44 (1997). In October 1998, the Commission filed 23 more such actions in a single day, targeting Internet touting seams in the microcap market. See Judith Burns, SEC Sweep Uncovers Microcap Hazards, WALL ST. J., Nov. 2, 1998, at A23C. These frauds have become so numerous that the SEC has established an office of Internet Enforcement for the sole purpose of patrolling scams in Cyberspace. See Jeri Clausing, Compressed Data

A recent unpublished study indicates that buyers often pay too much for assets when they communicate with sellers who are free to exaggerate or lie, confirming the SEC’s concerns over the risk of on-line stock fraud and the gullibility of investors accessing chat rooms and Internet message boards. See Judith Burns, E-Mail, Chat Rooms, Bulletin Boards Provide Inviting Spot for Stock Fraud, WALL ST. J., Nov. 18, 1998, at B11 (reporting on the study).

(39) Among other powers, the SEC has authority to seek civil penalties from federal courts, to impose civil fines, to issue cease-and-desist orders, to seek orders from federal courts prohibiting persons from serving as officers and directors of public companies, and to refer serious cases to the Department of Justice for criminal prosecution. At least two recent developments should be mentioned. First is passage of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 that greatly broadened the remedies the SEC could impose itself or seek from federal courts. See generally Ralph C. Ferrara et al., Hardball! The SEC’s New Arsenal of Enforcement Weapons, 47 BUS. LAW. 33 (1991). Second is passage of the 1995 Private Securities Litigation Reform Act’s reinstatement of the power of the SEC to punish those who merely aid and abet violations of Rule 10(b)

(40) See Herman & MacLean v. Huddleston, 459 U.S. 375 (1983) (recognizing existence of private cause of action under [sections] 10(b)).

(41) See, e.g., In re Convergent Technologies Sec. Litig., 948 F.2d 507, 512 (9th Cir. 1991) (“Some statements, although literally accurate, can become, through their context and manner of presentation, devices which mislead investors.”).

(42) See, e.g., Backman v. Polaroid Corp., 910 F.2d 10, 12 (1st Cir. 1990) (indicating situations where a “duty to speak” exists).

(43) TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (setting forth this widely-accepted definition in a proxy case)

(44) See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 & n.12 (1976) (holding that a “mental state embracing intent to deceive, manipulate or defraud” is a prerequisite to [sections] 10(b) liability).

(45) There are many different definitions of recklessness. One recent case defined the concept as a “highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standard of ordinary care … which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.” Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990).

(46) The reliance element has been said to be essential because it “provides the requisite causal connection between a defendant’s misrepresentations and a plaintiffs injury.” Basic, Inc. v. Levinson, 485 U.S. 224, 243 (1988)

(47) The Supreme Court has held that a plaintiff need not establish reliance in an omission case. Affiliated Ute Citizens of Utah v. U.S., 406 U.S. 128, 153-54 (1972)

(48) Under the “fraud on the market” theory, courts reason that purchasers of stock “rel[y] generally on the supposition that the market price is validly set and that no unsuspected manipulation has artificially inflated the price, and thus indirectly on the truth of the representations underlying the stock price.” Blackie v. Barrack, 524 F.2d 891, 907 (9th Cir. 1975). Thus, while an individual investor may not have viewed a false statement posted on a corporate Web site, if analysts and institutional investors did, they may have been misled and their trading then established an artificially-inflated stock price that the individual investor relied upon as accurate. The individual investor was, thus, indirectly misled. The Supreme Court adopted the “fraud on the market” theory in Basic, Inc. v. Levinson, 485 U.S. 224, 247 (1988).

(49) Some courts recognize a “fraud created the market” theory in cases involving nonefficient markets where the efficient market hypothesis that underlies the “fraud on the market” theory would not apply. See, e.g., Shores v. Sklar, 647 F.2d 462 (5th Cir. 1982) (en banc)

(50) A leading case is Bastian v. Petren Resources Corp., 892 F.2d 680 (7th Cir. 1990), in which plaintiffs claimed that they lost money after investing in an oil and gas limited partnership, which they would not have done had the defendants disclosed certain facts about their lack of honesty. The court believed that this allegation satisfied the transaction causation requirement, but not the loss causation requirement. The evidence showed that plaintiffs were intent upon investing in an oil and gas limited partnership and, had they not invested in defendants’ partnership, would have invested in another. Virtually all oil and gas limited partnerships lost money during this time, so plaintiffs would have lost their money even if they had invested in a different partnership. Id. at 684-85. Hence, loss causation was not shown.

(51) See Blue Chip Stamp Co. v. Manor Drug Stores, 421 U.S. 723, 737-49 (1975) (establishing the “purchaser or seller” requirement). The SEC, of course, automatically has standing to enforce the law and need not be a purchaser or seller.

(52) See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1171 (D.C. Cir. 1978).

(53) For a discussion of measures of damages under [sections] 10(b), see Robert B. Thompson, The Measure of Recovery finder Rule 10b-5: A Restitution Alternative to Tort Damages, 37 VAND. L. REV. 349 (1984).

(54) See 15 U.S.C. [sections] 78bb(a) (1998).

(55) See Lampf v. Gilbertson, 501 U.S. 350, 359-61 (1991) (creating a federal rule requiring that plaintiffs file within one year of when they knew or should have known of the violation and also within three years of the violation itself, a limitations period which in most cases is shorter than previous limitations periods drawn by analogy from state statutes).


(57) See Anthony Aarons, Why Them?, CAL. L. BUS., July 11, 1994, at 26, 39 (“[M]any high-tech executives say that waiting until [even] the summary judgment level [to settle a case] creates a large waste of resources.”).

(58) See, e.g., Janet C. Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 STAN. L. REV. 497, 569 (1991) (“Where there has been a sharp decline in the market price of a company’s stock, the mere filing of a complaint appears to be a ticket to a guaranteed and substantial recovery.”)

(59) See, e.g., Baruch Lev, Disclosure and Litigation, 37 CAL. MGMT. REV. 8, 9 (1995) (showing that, contrary to critics’ claims, large stock price declines following disappointing corporate announcements do not automatically trigger shareholder lawsuits)

(60) See Adam F. Ingber, Note, 10b-5 or not 10b-5? Are the Current Efforts to Reform Securities Litigation Misguided?, 61 FORDHAM L. REV. 351, 363 (Supp. 1993) (outlining early efforts of Coalition to Eliminate Abusive Securities Suits (CEASS), a lobbying group funded largely by high-tech companies and accounting firms).

(61) Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified as amended in scattered sections of 15 U.S.C.).

(62) See generally Harvey L. Pitt et al., Promises Made, Promises Kept: The Practical Implications of the Private Securities Litigation Reform Act, 33 SAN DIEGO L. REV. 845 (1996) (analyzing generally the impact of the PSLRA).

(63) See Edward A. Fallone, Section 10(B) and the Vagaries of Federal Common Law: The Merits of Codifying the Private Cause of Action Under a Structuralist Approach, 1997 ILL. L. REV. 71, 80 (1997) (“In reality, however, the most significant of the reforms embodied in the Act are purely procedural in character and do not affect the content or elements of the securities fraud cause of action in any significant way.”).

(64) This provision has led to nearly unparalleled disagreements in the lower courts as to what standard Congress meant to impose and how the standards should be applied in practice. See generally Elliott J. Weiss & Janet E. Moser, Enter Yossarian: How to Resolve the Procedural Catch-22 That the Private Securities Litigation Reform Act Creates, 76 WASH. U. L. Q. 457 (1998) (discussing the controversy and expressing concerns that, as applied by some courts, the PSLRA prevents potentially meritorious suits from proceeding).

(65) This provision is essentially a codification of the “bespeaks caution doctrine” that the lower courts had previously developed. See generally Donald C. Langevoort, Disclosures That “Bespeak Caution,” 49 BUS. LAW. 481 (1994) (discussing various applications of the doctrine). Congress codified the doctrine in order to encourage more forward-looking disclosure by companies, although it did make a few changes from the judicially-formulated version of the doctrine. See Jennifer O’Hare, Good Faith and the Bespeaks Caution Doctrine: It’s Not Just a State of Mind, 58 U. PITT. L. REV. 619, 638-44 (1997) (explaining differences between the judicially-formulated bespeaks caution doctrine and the PSLRA’s safe harbors).

(66) At least 31 parallel state court actions were filed in 1996, but 30% fewer state court filings occurred in 1997. See Karen Donovan, Full Stop For Fraud Suits in States?, NAT’L L. J., Mar. 23, 1998, at A1, A22. Studies showed that the state court actions were filed primarily to evade the PSLRA’s stays of discovery following the filing of motions to dismiss and its higher pleading standards. See Michael A. Perino, Fraud and Federalism: Preempting Private State Securities Fraud Causes of Action, 50 STAN. L. REV. 273, 337 (1998).

(67) Codified at 15 U.S.C. [sections] 77p and 15 U.S.C. [sections] 7Bbb(f) (Supp. 1996).

(68) See generally John C. Coffee, Jr., A Primer on Uniform Standards Act, N.Y.L.J., Dec. 17, 1998, at 5 (describing SLUSA generally)

(69) Although the PSLRA initially reduced federal securities class action filings to 103 in 1996, the number filed rose substantially in 1997 and 212 suits were filed in just the first 11 months of 1998. See Insurance Experts Believe Recently Passed Federal Legislation Curbing Securities Litigation Abuse Will Have Only a Modest Impact, PR NEWSWIRE, Dec. 14, 1998, available in LEXIS, News Library, Allnws File.

(70) Id. Nor, some experts believe, will SLUSA help achieve other goals of the PSLRA, such as increasing the amount for forward-looking disclosure. See Levine & Pritchard, supra note 12, at 46.

(71) Some commentators recommend that Web sites be segregated, clearly distinguishing posted promotional information from straight financial information. See Harris, supra note 34, at 14. In our sample, most companies provided the majority of their financial information in an Investor Relations or Shareholder Relations Web site section. However, we also found financial information mixed with other information under a variety of headings, including Customer Support (Circuit City), Corporate Publications (Cooper Industries), Company News (Burlington Industries), Town Hall (Nabisco), Corporate Info (America West) and Headquarters (Louisiana Pacific).

Because no specific information is required at a site, the user doesn’t know ex ante whether or not any particular item is available. Fruitless searches through unfamiliar terminology or confusing links may erroneously convince the user that information is not available.

(72) See, e.g., Paul Beckett, Companies Still Fear Class-Action Suits, WALL ST. J., Apr. 4, 1997, at B2 (quoting SEC Commissioner Steven Wallman as saying “We are finding far fewer cases of companies providing good forward-looking information than we had hoped.”)

(73) The Private Securities Litigation Reform Act of 1995 added safe harbors for forward looking statements to both the 1933 and 1934 Acts. It added [sections] 27A to the 1933 Act, 15 U.S.C. [sections] 77z-2, and Sec 21E to the 1934 Act, 15 U.S.C. [sections] 78u (Supp. 1996).

(74) See Lisa Klein Wager, Safe Harbors in Cyberspace, N.Y.L.J., Aug. 20, 1998, at 3 (noting that according to the PSLRA, to enter the safe harbor a company must provide “meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the forward-looking statement”).

(75) Wager notes that many companies place comprehensive disclosure of important risk factors facing the company’s business generally on their home pages and at the top of each Web site segment containing forward-looking information or provide hyperlinks to general discussions or risk factors. However, she concludes that these actions may not be sufficiently specific to gain protection from the PSLRA’s safe harbor. See id. at 3.

(76) See JOHN R. HEWITT & JAMES B. CARLSON, SECURITIES PRACTICE AND ELECTRONIC TECHNOLOGY [sections] 12.02[3], at 12-9 (1998) (“The posting of information on the Internet, or on a company’s Web site, can also increase the company’s potential liability under Rule 10b-5 because of the duty to correct.”)

(77) See, e.g., Backman v. Polaroid Corp., 910 F.2d 10, 16-17 (1st Cir. 1990) (en banc)

(78) See, e.g., Greenfield v. Heublein, Inc., 742 F.2d 751, 758 (3d Cir. 1984)

There are cases holding that forward-looking projections need not be updated. See, e.g., Stransky v. Cummins Engine Co., 51 F.3d 1329, 1331 (7th Cir. 1995)

(79) See Harvey L. Pitt & Dixie L. Johnson, Avoiding Spiders on the Web: Rules of Thumb for Issuers Using Web Sites and E-Mail, WALLSTREETLAWYER.COM, June 1997, at 2, 4 (recommending that persons who post be made responsible for periodically reviewing accuracy).

(80) See Metz, supra note 76, at 64.

(81) See Wager, supra note 74, at 3.

(82) The relevant line is: “Delta Air Lines makes no commitment to update this information.”

(83) The other disclaimers were “information is provided as is” or explicit safe harbor claims (which are discussed in further detail below).

(84) See Bell, supra note 9, at 5 (“If the company [creating a corporate Web site] has securities in registration or is planning a securities offering, the [securities law] considerations grow more complex.”)

(85) See Bell, supra note 9, at 5

(86) See Vaughan, supra note 84, at 8 (quoting attorney Meredith Cross as saying “The Internet is considered written communications, so if there is something on the Internet that is viewed as offering the security [before the registration statement’s effective date], then you violate the securities act [of 1933].”).

(87) See FRIEDMAN, supra note 13, at [sections] 3.05, p. 3-22.

(88) See Bell, supra note 9, at 5 (noting, additionally, that companies should not incorporate the company’s Web site, or any other site, by hyperlink into any electronic version of the company’s preliminary or final prospectus).

Fortunately for issuers, in two no-action letters the SEC staff has concluded that mere identification of the issuer’s Web site and statements such as “SEC filings are also available to the public from our web site” in a prospectus do not by themselves constitute improper incorporation by reference into the prospectus. See ITT Corporation, SEC No-Action Letter, 1996 SEC No-Act. LEXIS 895 (Dec. 6, 1996)

(89) See Vaughan. supra note 84, at 8 (quoting attorney Stephen Cooper).

(90) See New Rules Would End Road Show No-Action Requests, FIN. NETNEWS, Nov. 23, 1998, available in LEXIS, News Library, Allnws File. For example, in a no-action letter issued to NetRoadshow, the SEC decided to allow an electronic road show for a Rule 144A offering to qualified institutional buyers so long as the issuer placed limits on who could access the road show via a password-protected site. Under the aircraft carrier proposals, this limitation would no longer be applicable for many public offerings. Id.

(91) Another action that could definitely create a risk of liability is linking the corporate home page to an on-line “chat room” that follows the company. The potential for liability in this general area has been discussed elsewhere. See Morgan Molthrop, Chat Rooms–Investor Relations Latest Migraine, WALLSTREETLAWYER.COM, Sept. 1998, at 16

(92) The management discussion is intended to explain the results of the past year and to discuss upcoming plans, risks, and opportunities. The required content of the discussion is determined by various SEC regulations (see, e.g., Financial Reporting Release (FRR) No.1, Section 501.01:” [R]equirements requested information on financial condition as well as operations, with an emphasis on liquidity, capital resources and the impact of inflation, and, within each of those areas, a focus on trends and material changes, events and uncertainties.”) The forward looking portion of the discussion (opportunities and plans) is protected by Safe Harbor provisions when couched in appropriate language. The four basic financial statements are the income statement (also known as the statement of operations or profit and loss statement), the balance sheet (presents asset, liability and equity balances as of year end), the statement of shareholders’ equity (provides a summary of equity transactions during the year), and the statement of cash flows (provides details of operating, investing and financing cash flows during the year.) The footnotes range from accounting policies to derivative disclosures. Some of the information provided in footnotes is not otherwise incorporated into the basic statements (e.g. outstanding options). The footnotes are an integral part of the financial statements, a fact generally noted on the face of each individual statement. SEC regulations require that annual financial statements be audited, but do not necessarily require that the report be provided with the statements.

(93) Sixty-nine annual report excerpts were identified among the 402 sites. One was eliminated because it used Australian GAAP. Another was eliminated because the Web site was removed (due to a merger) before the additional data could be gathered.

(94) See Financial Accounting Standards Board (FASB), STATEMENTS OF FINANCIAL ACCOUNTING CONCEPTS, CON5, Paragraph 7a:

Information disclosed in notes … such as significant accounting policies or alternative measures for assets or liabilities, amplifies or explains information recognized in the financial statements. That sort of information is essential to understanding the information recognized in financial statements and has long been viewed as an integral part of financial statements prepared in accordance with generally accepted accounting principles.


(95) Rule 10b-5 specifically provides that it is a violation of [sections] 10(b) “[t]o omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. [sections] 250.10b-5 (1998).

(96) Courts agree with the accounting profession that footnotes are an essential part of financial statements. See Davis v. Dawson, Inc., 1998 U.S. Dist. LEXIS 10943, at *103 (D. Mass. Feb. 12, 1998).

(97) See Jack E. Karns, Independent Financial Analyst’s Reports and the `Post-Publication Ratification Theory’: Is a Company Liable for Voluntary Circulation of a Favorable Report?, 32 NEW ENG. L. J. 1023, 1024 (1998) (“Favorable financial reports are an extremely effective way for a company to make itself stand apart from its competitors and to establish its position in the market as warranting extra attention from potential investors.”)

(98) (visited November 11, 1998) <>.

(99) An example of an analyst specific disclosure was found at the Analog Devices web site <>. It read:

Analog Devices Inc. is followed by the analyst(s) listed above. Please note that any opinions, estimates or forecasts regarding Analog Devices Inc.’s performance made by these analysts are theirs alone and do not represent opinions, forecasts or predictions of Analog Devices Inc. or its management. Analog Devices Inc. does not by its reference above or distribution imply its endorsement of or concurrence with such information, conclusions or recommendations.

(100) See Bochner & Presser, supra note 11, at 17.

(101) Needless to say, if a company has paid for a particular analyst’s report, the electronic version of the report must disclose the fact and amount of the payment, just as a written copy must do. See 17 C.F.R. [sections] 240.14a-2(a)(6) (1998).

(102) See generally In re Syntex Corp. Sec. Litig., 95 F.3d 922 (9th Cir. 1996)

(103) See Interpretive Release, 60 SEC Docket (CCH) [paragraph] 1100 at example 16 (October 6,1995) (taking position that a hyperlink to an analysts’ report from a preliminary prospectus posed on the Internet is akin to delivering the report in the same envelope as the preliminary prospectus, which is not permitted during the waiting period).

(104) See Metz, supra note 76, at 62 (noting this danger).

(105) See id. (“It seems questionable that a disclaimer could overcome the strong inference created by including the report that the company believes the information in the report is accurate, worthy of investors’ review and representative of the company’s belief about the company’s prospects.”).

(106) See Prentice, The Future, supra note 11, at 68 (“[A] company should be liable if it directs investors via a hyperlink to analysts’ reports or news stories that it knows, or is reckless in not knowing, are inaccurate, disclaimers notwithstanding.”).

(107) is a product provided by Corporate Communications Broadcast Network (<>). It provides consulting and data for investor relations sections of corporate Web sites. CCBN personnel say that corporations using their service have absolute autonomy in determining the content of the IR section and retain all copyrights. However, tries to keep current with legal risks and requirements and to advise its clients accordingly.

(108) Bochner & Presser, supra note 11, at 15.

(109) 15 U.S.C. [sections] 77z-2(c)(2)(B) (Supp. 1996). One statement can be made at the beginning of an oral presentation containing several projections

(110) See Wager, supra note 74, at 3.

(111) See In re Boeing Sec. Litig., 1998 U.S. Dist. LEXIS 14803, at *21 (W.D. Wash. Sept. 8, 1998). See generally Dominic Bencivenga, Litigation Re-Formed

(112) Harvey L. Pitt & Karl A. Groskaufmanis, The Recently Enacted Securities Litigation Reform Act Gives Public Companies a Safe Harbor For Some Predictive Statements, NAT’L L. J., Jan. 15, 1996, at B4-B6.

(113) (visited November 11, 1998) <>.

(114) See Lisa Bransten, Start-Up Links Firms and Investors, WALL ST. J., Oct. 22, 1998, at B6.

(115) See Pete Barlas, Floating Stock on the Web: The Next Wave?, INVESTOR’S BUS. DAILY, Feb. 5, 1998, at A9 (describing plans of corporations such as Mobil, Chrysler & Eli Lilly).

(116) <>.

(117) <>.

(118) Untabulated results from our survey indicate that 42% of all sites had transfer agent information. However, direct stock purchase plans were usually not associated with this information.

(119) See Feldman & Salceda, supra note 11, at 5-12.

(120) See, e.g., Hemmings v. Alfin Fragrances, Inc., 690 F.Supp. 239, 244 (S.D.N.Y. 1988) (holding that securities fraud suit cannot be based on product claims)

(121) See Robert A. Prentice & John H. Langmore, Beware of Vaporware: Product Hype and the Securities Fraud Liability of High-Tech Companies, 8 HARV. J. L. & TECH. 1 (1994) (citing numerous cases).

(122) See Feldman & Salceda, supra note 11, at 5-12 to 5-13.

(123) See supra note 71.

(124) 15 U.S.C. [sections] 77k (1998).

(125) 15 U.S.C. [sections] 77l(a)(2) (1998).

(126) Metz, supra note 76, at 62.

(127) In re Carl Loeb Rhoades & Co., 38 S.E.C. 843, 851 (1959). See also SEC v. Thomas D. Kienlen Corp., 755 F.Supp. 936, 939-40 (D.Or. 1991) (noting that for securities law purposes the term “offer” has a much broader meaning than in contract law)

(128) See supra notes 84-86 and accompanying text.

(129) M. Louise Rickard & Joseph Kershenbaum, The Internet, Securities Offerings Made on the Web are Subject to a Panoply of Federal and State Regulations. But is the Paper Model Appropriate for Online Transactions?, NAT’L L. J., June 8, 1998, at B4 (noting that attorneys are advising issuers to “clean up” Web sites so that their communications cannot be construed as preconditioning the market)

(130) 17 C.F.R. [sections] 230.501-230.508 (1998).

(131) Use of Electronic Media for Delivery Purposes, Sec. Act. Rel. 7233, 1995 SEC LEXIS 2662, ex. 20 (Oct. 6, 1995).

(132) 15 U.S.C. [sections] 77l(a)(1) (1998).

ROBERT A. PRENTICE, Professor of Business Law, University of Texas. Copyright 1999 Robert A. Prentice, Vernon J. Richardson, Susan Scholz.

VERNON J. RICHARDSON, Assistant Professor of Accounting, University of Kansas.

SUSAN SCHOLZ, Assistant Professor of Accounting, University of Kansas.3