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The SEC recently issued an interpretive release that provides guidance to issuers of all types, including operating companies, investment companies and municipal securities issuers, as well as market intermediaries, on several issues involving the application of federal securities laws to electronic media¹ This memorandum provides a summary in outline format of the issues addressed by the SEC staff in the new release, with particular emphasis on the SEC staff's guidance regarding: (1) electronic delivery of communications to investors; (2) issuer liability for hyperlinks and other content on its web site; and (3) basic legal principles that issuers and market intermediaries should consider when making online offerings. In addition, this memorandum summarizes the SEC staff's requests for comment on a number of possible future initiatives relating to the use of electronic media.

I. Guidance on Electronic Delivery of Communications

A. Telephone Consent -- The new release states that investors may consent to electronic delivery of communications by telephone.

1. Previous SEC electronic media interpretive releases stated that informed consent must be made by written or electronic means. ²

2. The new release provides that telephonic consent is permissible as long as:

• the consent is obtained in a manner that ensures its authenticity (e.g., PIN number); and
• a detailed record of the consent is retained.

B. Global Consent -- The new release expands "global consent" of electronic delivery to include documents from multiple issuers.

1. The 1995 Release stated that consent to electronic delivery could relate to all documents delivered by a particular issuer.

2. The new release expands the concept to permit consent to a broker-dealer or other market intermediary to relate to electronic delivery of all documents of any issuer in which that investor buys or owns securities through that market intermediary.

C. Use of Portable Document Format ("PDF") -- The new release states that an issuer may provide PDF documents to investors as long as the issuer:

1. informs investors of the requirements necessary to download PDF when obtaining consent to electronic delivery; and

2. provides investors with any necessary software and technical assistance at no cost.

D. Clarification of the "Envelope Theory"

1. The "envelope theory" developed from a number of examples in the 1995 Release designed to assist issuers in meeting their delivery obligations electronically.

a. One example provided that documents in close proximity on the same web site menu are considered delivered together.

b. Other examples confirmed the proposition that documents hyperlinked to each other are considered delivered together as if they were in the same paper envelope.

c. These examples were designed to provide assurances to issuers that they are delivering multiple documents simultaneously as required by the securities laws.

2. The new release addresses concerns that if a prospectus meeting the requirements of Section 10 of the Securities Act of 1933 ("1933 Act") is posted on a web site, the operation of the envelope theory would cause everything on the web site to become part of the prospectus.

a. Issuers are advised that information on a web site becomes part of a prospectus only if an issuer acts to make it part of the prospectus. For example, if an issuer uses a hyperlink in the prospectus, the hyperlinked information would become part of that prospectus. When embedded hyperlinks are used in a prospectus, the hyperlinked information must be filed as part of the prospectus in the registration statement and will be subject to liability under Section 11 of the 1933 Act.

b. In contrast, a hyperlink from an external document to a Section 10 prospectus would be considered delivered together, but would not result in the non-prospectus document being deemed part of the prospectus.

II. Issuer Liability for Web Site Content

A. Issuer Responsibility for Hyperlinked Information -- The new release addresses issuer concerns that they can be held liable under the antifraud provisions of the federal securities laws for third-party information to which they link from their web sites.

1. The new release discusses the "entanglement" theory and the "adoption" theory as two ways in which an issuer can be held liable for statements of third parties (such as analysts):

a. Liability under the "entanglement" theory would depend upon an issuer's level of pre-publication involvement in the preparation of the information.

b. Liability under the "adoption" theory would depend upon whether, after its publication, the issuer explicitly or implicitly, endorses or approves the hyperlinked information.

2. The new release provides a framework for analyzing whether an issuer has "adopted" hyperlinked information.

a. Consider the context of the hyperlink.

(1) What does the issuer say about the hyperlink or what is implied by the context in which the issuer places the hyperlink?

(2) An issuer can be held responsible for the content of a hyperlink if it:

• explicitly endorses the link;
• uses the hyperlink to support an assertion; or
• remains silent about the hyperlink, if the context nevertheless implies that the hyperlinked information is attributable to the issuer.

b. Consider the risk of confusion.

1. The SEC staff expresses concern that a web surfer following a hyperlink to a third-party site may not know they are leaving the issuer's site.

2. The new release suggests that issuers limit confusion by making sure web surfers know they are linking to another site by using an intermediary page stating that the surfer is about to leave the issuer's web site to a third-party web site and that the information subsequently viewed is not attributable to the issuer.

c. Consider the presentation of the hyperlinked information.

(1) An issuer's efforts to direct an investor's attention to particular information by selectively providing hyperlinks may factor into whether such information has been adopted by the issuer.

The new release provides the following three examples of how the presentation of hyperlinked information can cause that information to be attributed to the issuer:

• where a wealth of information is available, the issuer hyperlinks to select information that is not representative of the available information;
• the issuer selectively establishes and terminates hyperlinks to a third-party web site depending on the nature of the information; or
• the issuer does something to differentiate a particular hyperlink from other hyperlinks on the web site (e.g., larger font size or different color).

B. Issuer Communications During a Registered Offering -- The new release provides guidance on the permissible content of information on issuers' web sites when they are in registration.

1. Issuers in registration are advised to consider the application of Section 5 of the 1933 Act to all of their communications with the public, including information on their web sites and information on third-party web sites to which they hyperlink.

• Information on a hyperlinked third-party web site that meets the definition of an "offer to sell,"offer for sale" or "offer" under Section 2(a)(3) of the 1933 Act "raises a strong inference that the hyperlinked information is attributable to the issuer for purposes of a Section 5 analysis."

2. The new release lists certain categories of permissible "ordinary-course business and financial information" and indicates that information falling into any of these categories, or a safe harbor under the 1933 Act, may be posted on an issuer's web site when in registration.

3. The new release notes that mutual funds continuously offer and sell their shares to the public and, therefore, are continuously subject to the limitations on issuer communications under the 1933 Act.

III. Online Offerings

A. Online Public Offerings -- The new release does not prescribe any specific procedures that must be followed for online public offerings. However, the SEC staff will continue to analyze this area as practice, procedures and technology evolve, with a view to possible regulatory action in the future.

B. Online Private Offerings

1. The new release notes that private offerings are more problematic because the internet can be deemed a form of general solicitation or advertising that is prohibited for private offerings.

2. Issuers are cautioned against deviating from the guidance provided in the IPONET interpretive letter. ³ In IPONET, the SEC staff permitted an arrangement where a registered broker-dealer invited previously unknown prospective investors to complete a questionnaire posted on a web site in order to qualify as an "accredited" or "sophisticated" investor. Once the investors qualified they would then have to open an account with the broker-dealer and would be issued a password that would allow them to access the private offerings on a password-restricted web site.

IV. Requests for Comment

A. "Access Equals Delivery" Model -- Are there any circumstances in which an "access equals delivery" model (under which investors would be assumed to have access to the internet, and an issuer could accomplish delivery by posting a document on its web site or a third party's web site) might be appropriate?

B. Online Notices of Document Availability -- Should the SEC permit notice of the availability of electronic disclosure documents to be provided through messages posted to investors' accounts on an internet web site?

C. Implied Consent -- Should issuers be permitted to rely on electronic delivery if investors do not affirmatively object when notified of an issuer's intention to deliver documents in an electronic format?

D. Electronic Only Offering -- Should a paper back-up system be required for offerings where participation is conditioned upon consent to electronic-only delivery?

E. -- The new release also requests general comments regarding issues raised by:

1. continuous availability of information posted on an issuer's web site;

2. communication when an issuer is in registration (including whether there are special considerations for mutual funds); and

3. internet discussion forums.

F. Comments must be filed with the SEC by June 19th.

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1: SEC Release Nos. 33-7856, 34-42728, IC-24426 (Apr. 28, 2000).

2: SEC Release Nos. 33-7233, 34-36345, IC-21399 (Oct. 6, 1995) (the "1995 Release"); SEC Release Nos. 33-7288, 34-37182, IC-21945 (May 9, 1996).

3: Divisions of Corporation Finance and Market Regulation interpretive letter IPONET (July 26, 1996).