Spotlight Returns to Corporate Websites
Corporate websites play an important role in many public companies’ investor relations programs. Recognizing this, several recent rules and proposals take advantage of corporate websites to expand investor access to information.
This Corporate Advisor addresses these new rules and proposals, particularly the new SEC rule requiring "accelerated filers" (see "Are You an Accelerated Filer?" below) to disclose in their Form 10-Ks whether they promptly post SEC reports on their corporate website. Since this new disclosure requirement covers time periods beginning November 15, 2002, companies should review their website posting practices now in order to avoid potentially embarrassing disclosure next year. In addition, in light of the legal liability that a company could face as a result of information contained on its website, this Corporate Advisor recommends general guidelines for the operation of a corporate website.
Overview of New Rules
New Required Form 10-K Disclosure for Accelerated Filers
A company that meets the new definition of an "accelerated filer" must disclose the following information in its annual reports on Form 10-K beginning with its first fiscal year ending on or after December 15, 2002:
- The company’s Internet website address, if it has one.1
- If the company has an Internet website, whether it makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available free of charge on or through its website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC.
- If the company does not make its filings available in this manner, the reasons it does not do so2 and whether or not the company will provide electronic or paper copies of these reports free of charge upon request.
What Should You Do Now?
Although most companies are already providing copies of, or access to, SEC reports on their websites, it is important to verify that these reports are being provided in a manner that will not require the company to make the disclosures described in the third bullet point above. The disclosure in a company’s next Form 10-K regarding whether the company makes its filings available on its website will cover the period from November 15, 2002 (the effective date of the new rule) until the end of the current fiscal year (for example, December 31, 2002 in the case of a calendar year-end filer). Accordingly, companies should review their web posting practices now and make any required changes prior to November 15.3 In particular, consideration should be given to the following:
- Same day posting is expected.
Other Upcoming Changes Affecting Corporate Websites
Effective no later than July 30, 2003, the Sarbanes-Oxley Act requires companies that maintain a corporate website to post on their website copies of Form 4s filed by insiders subject to Section 16 reporting. These postings must be made not later than the end of the business day after the Form 4 is filed. The SEC is encouraging companies to post Form 4s on their websites in advance of this mandate.
Several of the changes to stock market listing standards recently proposed by the NYSE would require website posting of key documents, including charters of key board committees, corporate governance guidelines, and codes of business conduct and ethics. In addition, each NYSE listed company would be required to state, in its annual report, that these documents are available on the company’s website.
Recommended Website Practices
While a website can be a valuable source of information about a company and serve as a useful marketing and investor relations tool, it is important for a company (and in particular the company personnel responsible for administering the website) to be aware of the applicable legal standards and constraints.
In short, the legal standards applicable to press releases and other public communications by a company are equally applicable to the company’s website. The SEC has explicitly stated that "[t]he federal securities laws apply in the same manner to the content of [companies’] web sites as to any other statements made by or attributable to them."
If a company’s website includes an inaccurate or misleading statement, the company may be liable to anyone who incurred a loss by buying or selling company securities in reliance upon such statement. In addition, it is possible that a company could incur liability to customers based upon a claim that they licensed or purchased products and services from the company in reliance upon inaccurate or misleading statements on the company’s website.
Administration of the WebsiteTreat the website as an integral component of the company’s IR program. A company’s website should be subjected to the same review and level of care as all other public statements made by the company (such as press releases) and should be operated in a manner that is consistent with, and supportive of, the company’s overall investor relations program.
Establish a separate IR section on the website. A company should group all investor relations materials into a single designated area on its website. This practice will facilitate appropriate use of the legends and disclaimers described below. In addition, the practice of having a designated IR section may in the future be helpful if the company is required to respond to SEC comments about its website in the context of a securities offering. Keep in mind, however, that responsibility under the securities laws for content on a company's website extends to the entire website and not just the IR section.Appoint a responsible webmaster. A company should appoint one person with responsibility for reviewing and approving all material before it is posted on the company's website. This person should be familiar with the risks and legal rules applicable to public disclosures generally and website postings in particular, and should be knowledgeable about the company, its business and significant recent or pending developments in its business.
Systematically review all website content. A company should periodically review all information on its website for the purpose of updating or deleting inaccurate or misleading information. It may be appropriate for the company’s newly formed disclosure committee to oversee this process. Older information that the company wishes to retain for informational purposes (such as press releases and SEC filings), should be segregated into an archived section which includes a disclaimer such as:
"This part of our website contains archival information which should not be considered current and may no longer be accurate."
A recent SEC enforcement action highlights the importance of this practice. In October 2002, the SEC charged a mutual fund company with violating the Securities Act of 1933 by posting outdated and misleading performance returns on its website. According to the SEC, as late as December 2000, the mutual fund company website prominently proclaimed returns of over 400%, even though such returns only represented the period from the fund’s inception through March 2000.Maintain in-house capabilities to post and remove web content. While many companies find it cost-effective to work with outside vendors to maintain and update their website, it is important not to become 100% dependent on outside vendors.
Use the website as a tool for complying with Regulation FD:
Third Party LinksEvaluate the risk of adoption whenever providing hyperlinks. Whenever a company provides a hyperlink to information contained on someone else’s website, there is a risk that the company will be deemed to have adopted the statements made on that other website and, therefore, will have responsibility for those statements as if the company had made the statements itself. There is no bright-line test for determining if hyperlinked information has been adopted. However, the SEC set out the following three-prong framework for analyzing adoption issues as part of an April 2000 interpretive release:
- Context of the hyperlink. Whether third-party information to which a hyperlink has been established is attributable to a company will be influenced by what the company says about the hyperlink or what is implied by the context in which the company places the hyperlink. For example, there would be a high risk of adoption if the company says: "XYZ site has the best description of our market opportunity."
- Risk of confusion. The presence or absence of precautions against investor confusion about the source of hyperlinked information is another relevant factor. Hyperlinked information is less likely to be attributed to a company if the information is preceded or accompanied by a clear and prominent statement that indicates that the third-party information is not provided by the company and that the company disclaims responsibility for the information. In contrast, the risk of adoption is higher when information on a third-party website is presented on the company's website in a manner that makes the third-party information appear to be part of the company’s website. Note, however, that a disclaimer alone is not sufficient to insulate the company from responsibility for hyperlinked information.
- Presentation of hyperlinked information. The presentation of hyperlinked information by a company is relevant in determining whether the company has adopted the information. Examples of risky practices that a company should avoid include selectively providing hyperlinks so that information accessed is not representative of available information, and selectively establishing and terminating hyperlinks to third-party websites depending upon how favorable the linked information is to the company. In addition, screen layouts which disproportionately influence an investor's decision to view particular hyperlinks through the use of different color, type face or size would suggest that the company has adopted the hyperlinked information to which the company is drawing investor attention.
- Maintain a distinctive look and feel. Adopt a common appearance for the company’s website which helps indicate which pages are part of the company’s website and effectively differentiates the company’s website from linked third-party websites.
- Avoid framing. Avoid framing, which is the practice of presenting third-party website content within a window that has a look and feel consistent with the company’s own website.
- Avoid deep linking. Avoid deep linking, which is the practice of using a hyperlink to access a selected portion of a third-party website or report (for example, the paragraph that says the company’s products are the best) instead of the report in its entirety (by linking the user to the beginning of the report).
- Use exit screens. Include a clear and prominent statement, such as an intermediate screen, to the following effect:
Don’t voluntarily include hyperlinks in documents filed with the SEC. In April 2000, the SEC stated that if a company includes a hyperlink within a document required to be filed or delivered under the federal securities laws, the company will always be deemed to have "adopted" the hyperlinked information. In response to public comments raising concerns that the new rule requiring inclusion of a company’s website address in Form 10-K might result in the incorporation by reference of all website information into the Form 10-K, the SEC stated that the inclusion of a company’s website address in compliance with the new disclosure requirement will not, by itself, include or incorporate by reference the information on the website into the filing, unless the company otherwise acts to incorporate the information by reference. The SEC also noted that its April 2000 guidance on the effect of including a website address in a filing remains unchanged for situations where a company voluntarily includes a website address.
"You are now leaving our website. Name of company assumes no responsibility for information or statements you may encounter on the Internet outside of our website. Thank you for visiting www.nameofcompany.com."
In accordance with the SEC’s prior interpretive guidance, whenever a company includes its website address in an SEC filing, it should remove any embedded "tagging" which converts the URL into an active hyperlink and should include the address in the following manner:
Avoid hyperlinks to analyst reports. A company should not include reports of financial analysts (or hyperlinks to such reports) on the company’s website. If for investor relations reasons the company wishes to list analysts who publish reports about the company, it should list all securities analysts, not just the favored analysts or the analysts whose reports are positive. This list of analysts should be presented in alphabetical order, without giving disproportionate prominence to any one analyst through the use of different color, typeface or size. In addition, a disclaimer to the following effect should be included:
"Our website address is www.nameofcompany.com. The information on our website is not incorporated by reference into this document and should not be considered to be a part of this document. Our website address is included in this document as an inactive textual reference only."
"The foregoing list includes the names of all brokerage firms known by the company as of [insert date] to have analysts covering the company. This list may not be complete and is subject to change as firms add or delete coverage. Please note that any opinions, estimates or forecasts regarding the company made by these analysts are theirs alone and may not represent the opinions, estimates or forecasts of the company. The company is providing this listing as a service to its stockholders and is not by this listing implying its endorsement of or concurrence with such analyst reports. Interested persons must obtain copies of analysts’ reports on their own; the company does not distribute these reports."
Other Legends and DisclaimersInvoke the safe harbor. The Private Securities Litigation Reform Act of 1995 provides that a written forward-looking statement made by a public company enjoys significant protection from a federal securities fraud claim if it is identified as a forward-looking statement and is accompanied by meaningful cautionary statements identifying factors that could cause actual results to differ materially from those projected. To take advantage of the safe harbor, a company should include language similar to the following at the bottom of the main screen of the company’s website, prominently on the first page of the IR section and prominently on any other pages which are intended primarily for investors or which contain forward-looking information:
"The documents contained in (or directly accessible from) this website include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about [add appropriate description] and any other statements containing the words "believes", "expects", "anticipates", "plans", "estimates" and similar expressions. There are a number of important factors that could cause [company name]’s actual results to differ materially from those indicated by such forward-looking statements, including [add appropriate risk factor language] and other factors identified in the company’s most recent Annual Report on Form 10-K and subsequent reports filed with the SEC. The company disclaims any intention or obligation to update any forward-looking statements as a result of developments occurring after the date such statement was first made."
Extra care should be taken when crafting the safe harbor disclosure with respect to audio or visual materials that are made available for replay on the company’s website and for any transcripts of audio or visual materials. The Private Securities Litigation Reform Act "safe harbor" warning that is given orally at the beginning of an analyst call most likely cites cautionary language (by referring to risk factor-type disclosure in an SEC filing) rather than states such cautionary language. A disclaimer citing cautionary language, while valid to protect oral forward-looking statements, is not sufficient with respect to written forward-looking statements such as those that would be created by the reproduction of a transcript of the call. Moreover, in some contexts, the SEC has taken the position that an audio-only replay will be treated the same as a written document.Clearly indicate the date of posted information. To help reduce the risk of claims that information on a company’s website is out of date or omits recent material developments, information should be conspicuously dated, and the company should disclaim any duty to update. It is important that the company update the "as of" date for information on only those sections of the website where the substantive content has been updated, to avoid the implication that sections that have not been updated are more current than they actually are. A company should also avoid statements such as "here is the latest news" which make information look more up to date than it actually is.Identify data sources and limitations. Corporate websites generally include historical stock price information as well as the ability to obtain recent stock quotes. A company should clearly indicate any limitations on data it provides (for example, the fact that the stock quote is provided on at least a 20 minute delay) and indicate that the data is provided for informational purposes only and should not be relied upon in making investment decisions. A sample disclaimer is as follows:
"This data is provided as a convenience for stockholders and is for informational purposes only. This data is not intended, and should not be relied upon, for trading purposes. Neither the company nor its data providers guarantee the accuracy or completeness of any stock price or other data displayed, nor shall any such party be liable in any way to the user of the data or to any other person for any delays, inaccuracies, errors in, or omission of any such data or the transmission thereof, or for any actions taken in reliance thereon or for any damages arising therefrom or occasioned thereby. Investors are reminded that historical and current stock price performance data are not necessarily indicative of future performance."
In addition, the company should review its agreements with any data providers to ensure that all contractually mandated disclaimers are being provided.Tailor disclaimers to the company’s circumstances. The most effective disclaimers are those that do not read like boilerplate. Accordingly, when working with model disclaimers, such as those presented above, a company should look for ways to make the disclaimer more relevant to the company’s particular circumstances.
General Guidelines Concerning Website ContentOnly post public information. No confidential information should be put on a company’s website. In addition, no material information should be put on the website until after it has been publicly disseminated through an SEC filing, press release or other means satisfying Regulation FD. Extra care should be taken to ensure that only the final versions of documents (such as press releases) are posted, and not near-final drafts. Documents should also be cleansed of all metadata or other internal codes before posting to avoid the accidental disclosure of hidden data (for example, users should not be able to turn on the "track changes" or similar feature of a posted document to reveal previous drafts of the document).
Avoid posting projections. This applies both to projections of financial results (whether prepared by a company or third parties) and other types of predictive statements regarding a company’s business (such as the dates of future product releases, expectations of market share to be achieved, etc.). While some companies post consensus numbers, such as those published by First Call, this practice raises significant concerns and has in the past been challenged by the SEC as constituting impermissible offering material in the context of securities offerings.Avoid hyperbolic statements. A company should avoid hyperbolic or excessively optimistic statements on its website, just as it does in press releases. For example, claims that a particular product is the "best in the industry", "the market leader" or "the only product that . . . " should be avoided unless there is objective support for such statements.
Consider intellectual property issues. A company should not post materials on its website that it does not own or have a valid right to use. For example, while most commentators believe that providing an unframed link to a third-party website is permissible without the other party’s consent, the use of the other party’s corporate logo as a link might violate the other party’s trademark rights.Comply with export control laws. Before posting, review any technical information or computer software for export control compliance. Technical information or computer software made available on a website is generally considered to constitute an "export" and may require an export license from the U.S. Government.
Business Combination Transactions. A proxy solicitation, tender offer or other business combination transaction involving a company may also be subject to securities regulations which impose restrictions and/or filing requirements on public disclosures by the company, including information on the company’s website. The company should consult with its securities counsel regarding the company’s website if it is contemplating such a transaction. Websites During Corporate Transactions
Websites During Corporate TransactionsSecurities Offerings. If a company is engaged in or contemplating an offering of its securities, whether via a registered public offering or a private placement, its website becomes subject to additional securities law restrictions. Federal securities laws place numerous restrictions on an "offer" by the company of its securities, including the information that must be included in or accompany offers, when offers may be made, and the persons to whom offers may be made. The term "offer" is broadly construed by courts and the SEC to include most types of public communications by a company, including website postings, that have the intent or the effect of promoting a company to prospective investors or otherwise eliciting interest in a company or its securities. In addition, registered securities offerings impose more stringent antifraud obligations on a company. The SEC routinely reviews corporate websites as part of its review of securities offerings and frequently comments on materials that are posted or to which there are links. Accordingly, the content of the company’s website must be carefully reviewed if the company plans to make an offering of its securities. In addition, a company should generally refrain from adding significant new information to its website during, or shortly before, an offering of its securities. The company should consult with its securities counsel regarding the company’s website if it is contemplating an offering of securities.
Are you an Accelerated Filer?
An "accelerated filer" is a company that meets the following conditions as of the end of its fiscal year:
- The public float of its common equity (that is, the aggregate market value of the company’s outstanding voting and non-voting common equity minus the value of common equity held by affiliates of the company) was $75 million or more as of the last business day of its most recently completed second fiscal quarter (June 28, 2002 for calendar year companies assessing their accelerated filer status this year);
- the company has been subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 for a period of at least 12 calendar months;
- the company has previously filed at least one annual report pursuant to Section 13(a) or 15(d) of the Exchange Act; and
- the company is not eligible to use Forms 10-KSB and 10-QSB, which are the periodic reporting forms for use by small business issuers.
A company that does not fall within the accelerated filer definition as of the end of its first fiscal year ending on or after December 15, 2002 will have to re-evaluate its status at the end of each subsequent fiscal year. Once a company becomes an accelerated filer, it will remain an accelerated filer unless and until it subsequently becomes eligible to use Forms 10-KSB and 10-QSB for its annual and quarterly reports.5 In that case, the company ceases to be an accelerated filer unless and until it again meets the accelerated filer criteria.
Every company will be required to check a box on the cover of its quarterly and annual reports to indicate whether it is an accelerated filer. This requirement will not apply to companies filing their Form 10-Q for a quarter ended on or before September 30, 2002, since such report must be filed on or prior to November 14, 2002 (one day prior to the effectiveness of these rules).
Every company will also be required to disclose on the cover page of its annual report its public float as computed on the last business day of the company’s most recently completed second fiscal quarter. This new requirement replaces the existing requirement that a company indicate its public float as of the most recent practicable date prior to filing.
1 If a company maintains multiple websites for different business purposes, then it must only disclose the address of the website it normally uses for investor relations purposes.
2 When a company does not maintain a website, a statement to that effect is sufficient to meet this part of the disclosure requirement.
3 For a calendar year-end filer, since the third quarter Form 10-Q will be filed prior to November 15, the required disclosure in the Form 10-K for the year ending December 31, 2002 will not be affected by how the company posts its third quarter Form 10-Q. Nevertheless, calendar year-end companies should review their web posting practices, since they may need to file a Form 8-K or an amendment to one of their SEC reports prior to December 31, 2002.
4 A company is allowed to use an intermediate screen that informs users that they are exiting the company’s website and includes appropriate disclaimers about the company’s responsibility for the accuracy of the third-party website.
5 A company must meet the definition of a small business issuer at the end of two consecutive fiscal years in order to qualify as a small business issuer.