United States: Securities Laws And Your Company

Your business's website may be violating some anti-fraud provisions of the U.S. Securities Laws. Certain anti-fraud laws found in the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, may subject your company to unforeseen liability and possibly enforcement action.

This article addresses Section 10(b) of the Securities Exchange Act and its related Rule 10b-5. These prohibit, in connection with the purchase or sale of any security, the use of, among other things, untrue statements of material facts or the omission of material facts if such omission would make other statements misleading. These laws regulate communication in connection with the purchase or sale of any securities.

Effective May 4, 2000, the SEC published an interpretive release dealing with the use of electronic media such as the Internet (See Release 33-7856; 34-42728). One set of issues discussed in the release concerns website content and the "hyperlinking" (i.e. linking) to other websites and third party content. Your company's website may provide such links, and if so, depending on the statements made in the hyperlinked content (or for that matter material your company's website "frames"), your website may be subjecting your company to an unforeseen risk of liability.

The release discusses two theories used by the courts and the SEC in analyzing issuer responsibility for hyperlinked information. Liability under the "entanglement" theory focuses on the issuer's involvement in the preparation of the information. The "entanglement" theory is relatively straightforward: If your company prepares the material or portions of it, your company may be held liable as an author of such material. However, liability under the second theory, known as the "adoption" theory, may cause unforeseen liability. The "adoption" theory depends on whether after preparation and publication of information by a third party, the issuer either "explicitly or implicitly endorses or approves [of] the hyperlinked information."

The newly issued release discusses both the entanglement and adoption theory in light of the Internet and its application to website content. It is clear from the release that if your company's website hyperlinks to information or content created by a third party, your company may be deemed to be "adopting" such statements, and if such statements are false, fraudulent or misleading, your company could be exposed to liability.

A strategy for reducing your company's potential liability exposure in such cases can be accomplished by assessing the current state of your company's website and any third party content to which your company's website hyperlinks. Your company should preferably segregate general corporate and investor relations materials on its website from marketing and sales related information which is geared more for the consumer. Once this segregation is accomplished, the context of any hyperlinks to third party content should clearly identify that the web user is hyperlinking to third party content and that the company disclaims responsibility for such third party's statements. This will help to dispel any confusion as to the source of the information. Also, if your company hyperlinks to security analysts' reports of your company, your company should not discriminate in its selection, but rather should link to both "positive" and "negative" analysts' reports.

The best strategy is for your company's website not to hyperlink to controversial material. If you must hyperlink to statements about your company, you should carefully review such statements on a periodic basis. You should properly identify when a web user is linking to third party content from your website and you should disclaim responsibility or endorsement of statements made by such third parties. However, even proper identification and a disclaimer may not be enough to eliminate your potential liability. The best course of action is to review the third party content to make sure that even if your company were deemed to "adopt" such statements that such statements are not false, misleading or fraudulent with respect to your company and its securities.