[Federal Register Volume 60, Number 198 (Friday, October 13, 1995)]
[Rules and Regulations]
[Pages 53458-53467]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25391]
[[Page 53457]]
_______________________________________________________________________
Part II
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Parts 231, 232, and 239 et al.
Use of Electronic Media for Delivery Purposes; Final Rule and Proposed
Rule Electronic Filings of Forms 3, 4, 5, and 144; Notice
Federal Register / Vol. 60, No. 198 / Friday, October 13, 1995 /
Rules and Regulations
[[Page 53458]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 231, 241 and 271
[Release No. 33-7233; 34-36345; IC-21399 File No. S7-31-95]
RIN 3235-AG67
Use of Electronic Media for Delivery Purposes
AGENCY: Securities and Exchange Commission.
ACTION: Interpretation; Solicitation of comment.
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SUMMARY: The Securities and Exchange Commission (the ``Commission'') is
publishing its views with respect to the use of electronic media for
information delivery under the Securities Act of 1933, the Securities
Exchange Act of 1934, and the Investment Company Act of 1940. This
interpretive guidance is intended to assist market participants in
using electronic media to provide information under the federal
securities laws and to encourage continued research and development and
use of such media. The Commission is seeking comment on issues
discussed in this release. In a companion release, the Commission is
proposing technical amendments to Commission rules that are currently
premised on the distribution of paper documents.
DATES: This Interpretation is effective on October 6, 1995. Comments
should be received on or before November 27, 1995.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Stop 6-9, Washington, D.C. 20549. Comment letters should refer to
File No. S7-31-95. All comments received will be available for public
inspection and copying at the Commission's Public Reference Room, 450
Fifth Street, NW, Washington, D.C. 20549.
FOR FURTHER INFORMATION CONTACT: Joseph Babits or James Budge (202)
942-2910, Division of Corporation Finance; and, with regard to
questions concerning investment companies or investment advisers,
Robert G. Bagnall or Emanuel D. Strauss (202) 942-0660, Division of
Investment Management, U.S. Securities and Exchange Commission, 450
Fifth Street, NW, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Commission today is publishing its views with respect to using
electronic media as a means of delivering information required under
the Securities Act of 1933 (``Securities Act''), 1 the Securities
Exchange Act of 1934 (``Exchange Act''), 2 and the Investment
Company Act of 1940 (``Investment Company Act''). 3 Advances in
computers and electronic media technology are enabling companies to
disseminate information to more people at a faster and more cost-
effective rate than traditional distribution methods, which have been
largely paper-based. The Commission appreciates the promise of
electronic distribution of information in enhancing investors' ability
to access, research, and analyze information, and in facilitating the
provision of information by issuers and others. The Commission believes
that, given the numerous benefits of electronic distribution of
information and the fact that in many respects it may be more useful to
investors than paper, its use should not be disfavored.
\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
\3\ 15 U.S.C. 80a-1 et seq.
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Until recently, on-line use of corporate information was generally
limited to large corporations and institutional investors. The dramatic
growth in personal computer ownership, 4 however, is enabling many
small investors to access on-line corporate information just as readily
as institutions. Access to information through electronic means permits
small investors to communicate quickly and efficiently with companies
as well as with each other.5
\4\ While estimates of computer ownership vary from survey to
survey, it is anticipated that computer ownership will grow
dramatically in the next few years. One recent survey suggests that
nearly half of all American households own at least one computer and
about 16% of those households that own a computer subscribe to on-
line services. See B. L. McLaughlan, ``Wired Nations: Half of U.S.
Homes Now Have a Computer,'' The Detroit News, July 21, 1995, Meet
News section. Another survey, however, found that only 31% of
American households own a personal computer. See J. Morrison, ``Hot
Modems, Cold Lives: Refugees From Cyberspace,'' The New York Times,
April 30, 1995, Section 1, col. 2, p. 45.
\5\ See, G. Weiss, ``Online Investing--At Your Fingertips Is A
Powerful New Financial Tool,'' Business Week, June 5, 1995, at 64.
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Use of electronic media also enhances the efficiency of the
securities markets by allowing for the rapid dissemination of
information to investors and financial markets in a more cost-
efficient, widespread, and equitable manner than traditional paper-
based methods. Recognizing the multiple benefits of electronic
technology, the Commission initiated its Electronic Data Gathering,
Analysis, and Retrieval (``EDGAR'') system in 1984 to automate the
receipt, processing and dissemination of disclosure documents filed
with the Commission under the Securities Act, Exchange Act and
Investment Company Act. 6 As a result of this automation, filings
made with the Commission through EDGAR are available promptly to the
public and financial markets. Today, more than 70% of all domestic
public companies file electronically through EDGAR, and by May 1996,
all domestic registrants will be required to file electronically
through EDGAR. 7
\6\ Access to EDGAR filings is generally available through
information resellers that have purchased the data from the EDGAR
dissemination subsystem and created a variety of on-line and CD-ROM
versions. At the present time, 20 firms purchase data and create
value-added products for analysts and the investor community. In
addition, there is strong interest in ensuring that EDGAR documents
are available, especially to individual investors, at the lowest
possible cost. In January 1993, the New York University School of
Business and the Internet Multicasting Service, a non-profit
organization, received a grant from the National Science Foundation
to make most EDGAR material available on the Internet. This grant
expired on October 1, 1995. The Commission recently announced that
it would package EDGAR filings with its own separate Internet
service. This service, which began September 28, 1995, makes EDGAR
filings as well as certain Commission releases and announcements
available on the Internet. The Internet World Wide Web site address
is http://www.sec.gov.
\7\ In order to encourage the rapid dissemination of additional
information considered valuable by many members of the investment
community, the Commission today is announcing its intention to
expand the capacity of the EDGAR system to accommodate the
electronic filing of ownership and transaction reports filed
pursuant to Section 16 of the Exchange Act [15 U.S.C. 78p] and Rule
144 [17 CFR 230.144] under the Securities Act. See Release No. 33-
7231. The necessary programming already has been initiated and
filers should be able to file these documents electronically on a
voluntary basis by late 1995 or early 1996. A further announcement
will be made when the effective date is determined.
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The EDGAR rules apply only to filings made with the Commission; the
rules do not affect the obligation of filers to deliver to security
holders or potential investors documents such as prospectuses, tender
offer materials and proxy or information statements.8 As the
ability to send and receive information in electronic form has become
more prevalent, issuers and other market participants have begun
requesting interpretive guidance regarding the electronic delivery of
these documents.9
[[Page 53459]]
Moreover, hundreds of issuers are providing information through
electronic means, primarily through computer networks.
\8\ See Release No. 33-6977 at Section V.F (February 23, 1993)
[58 FR 14628].
\9\ For purposes of this release, the term ``electronic'' refers
to media such as audiotapes, videotapes, facsimiles, CD-ROM,
electronic mail, bulletin boards, Internet Web sites and computer
networks (e.g., local area networks and commercial on-line services)
to provide documents required by the federal securities laws to
investors, security holders, and offerees. Such documents include:
prospectuses required to be delivered in connection with offerings
under the Securities Act; annual reports to security holders and
proxy or information statements required to be furnished pursuant to
Section 14 of the Exchange Act [15 U.S.C. 78n]; annual and semi-
annual reports required by Section 30(d) of the Investment Company
Act [15 U.S.C. 80a-29(d)]; documents furnished to investors in
connection with tender offers or going private transactions;
offering circulars delivered in connection with Regulation A [17 CFR
230.251-263] offerings; and disclosure required to be furnished in
connection with Regulation D [17 CFR 230.505, 506] offerings
(issuers should be mindful of the current prohibition in Rules 505
and 506 regarding general solicitation, see Examples 20 and 21).
Other documents may include annual reports on Form 10-K [17 CFR
249.310] and other reports required to be furnished upon request to
a security holder or the recipient of a prospectus using
incorporation by reference. Additionally, this release addresses the
electronic delivery of elective information, such as quarterly
reports to security holders and sales literature. But see n. 12,
below.
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In February 1995, the Commission's Division of Corporation Finance
issued an interpretive letter intending to address certain legal issues
relating to electronic delivery of prospectuses (``Brown & Wood
letter''). 10 The Brown & Wood letter established a number of
conditions in order for a prospectus to be considered ``delivered''
electronically. The intention at the time of the release of the Brown &
Wood letter was that the Commission would review this area in greater
detail after the issuance of the letter with a view toward, through an
appropriate release, providing further interpretive advice or proposed
rulemaking. Because of these developments, along with the fact that
none of the federal securities statutes exclusively require paper
delivery of information, the Commission believes that interpretive
guidance on the use of electronic media is appropriate. While the
Commission anticipates that issuers and others will rely upon the
guidance of this release, continued reliance on the generally more
stringent requirements of the Brown & Wood letter is no longer
required, but would be permissible.
\10\ See Brown & Wood (February 17, 1995).
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This interpretive release addresses only the procedural aspects
under the federal securities laws of electronic delivery, and does not
affect the rights and responsibilities of any party under the federal
securities laws. 11 This release addresses the delivery of
information by or on behalf of issuers, as well as by or on behalf of
third parties (such as persons making tender offers or soliciting
proxies) with respect to issuers. 12
\11\ 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 laws as set forth in
Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5
[17 CFR 240.10b-5] thereunder would apply to any information
delivered electronically, as it does to information delivered in
paper. As another example, Section 17(b) of the Securities Act [15
U.S.C. 77q(b)] would apply to any report circulated on the Internet
just as if the report were provided in paper.
In addition, this release does not affect any applicable state
laws or self-regulatory organization rules. Consequently, issuers
and others need to consider the potential application of state law
(e.g., state securities laws and business corporation laws) and
other rules. At least one state has addressed issues relating to the
use of electronic media in securities offerings. Recently, the
Pennsylvania Securities Commission issued an order, effective for a
period of one year beginning September 1, 1995, exempting from state
qualification requirements securities offers made on the Internet
where: 1) the offer indicates directly or indirectly that the
securities are not being offered to persons in Pennsylvania; 2) an
offer is not being made to any person in Pennsylvania by other
means; and 3) no sales of the issuer's securities are made in
Pennsylvania as a result of the Internet offer. See Order of the
Pennsylvania Securities Commission In Re Offers Effected Through
Internet That Do Not Result In Sales In Pennsylvania, dated August
31, 1995. In addition, the North American Securities Administrators
Association, Inc., an association of securities commissioners from
each of the 50 states, the District of Columbia, Puerto Rico,
Mexico, and several Canadian provinces, has a committee that is
addressing various issues, including jurisdictional authority,
surrounding the use of electronic media in the offering of
securities across state lines.
The National Association of Securities Dealers, Inc. recently
reminded its members of the applicability of its Rules for Fair
Practice to electronic communications. See Special Notice to
Members, 95-80, September 26, 1995.
\12\ Although Section 2(10) of the Securities Act [15 U.S.C.
77b(10)] defines ``prospectus'' to include a writing that ``confirms
the sale of any security,'' this release does not authorize
transmission of confirmations, as required by Rule 10b-10 under the
Exchange Act [17 CFR 240.10b-10] through electronic means.
Consequently, while this release anticipates the electronic delivery
of Section 10(a) prospectuses [15 U.S.C. 77j(a)], confirmations that
are used to satisfy the delivery of a Section 10(a) prospectus, as
permitted by Securities Act Rule 434 [17 CFR 230.434], cannot be
delivered electronically at this time, unless specifically permitted
as discussed below.
Under current interpretations of Rule 10b-10, confirmations may
not be delivered electronically unless the Commission has
specifically permitted such delivery. The Commission has recognized
the use of a facsimile machine to send customer confirmations. Thus,
if a customer has a facsimile machine, a broker-dealer would fulfill
its confirmation delivery obligation if it sent the confirmation via
facsimile transmission. Release No. 34-34962 (November 9, 1994), 60
FR 59612, 59614 n.28. The Commission, acting by delegated authority,
also has allowed, under specified conditions, confirmations to be
sent by electronic means. See, e.g., Thomson Financial Services
(October 8, 1993). Applications for exemption from the requirements
under Rule 10b-10 for delivery by paper or facsimile, pursuant to
paragraph (e) of the Rule, may be sent to Catherine McGuire, Chief
Counsel, Division of Market Regulation, U.S. Securities and Exchange
Commission, 450 Fifth Street, N.W., Mail Stop 5-10, Washington, D.C.
20549.
The Commission has directed the Division of Market Regulation to
review this and other rules to determine if and under what
conditions electronic delivery of information required by those
rules is feasible. The Commission expects that this review will
result in the issuance of additional releases relating to these
rules.
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Additionally, to facilitate further electronic delivery, the
Commission proposes in a companion release to codify certain
interpretations regarding Commission rules that are premised on the
distribution of paper documents. 13 The rules would be revised to
make it clear that paper-based requirements relating to font size,
bold-face type, red ink, graphics, and mailing may be modified as
appropriate for documents delivered in electronic format. 14 The
proposals are not intended to affect any substantive requirement.
\13\ See Release No. 33-7234.
\14\ See Section III, below.
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Given the numerous benefits of electronic media, the Commission
encourages further technological research, development and application.
The Commission believes that the use of electronic media should be at
least an equal alternative to the use of paper-based media.
Accordingly, issuer or third party information that can be delivered in
paper under the federal securities laws may be delivered in electronic
format.\15\ The Commission also expects that paper delivery of
information will continue to be made available by issuers and others
until such time as electronic media become more universally accessible
and accepted, although the Commission recognizes that, for example,
various offerings may now be made exclusively through electronic
means.\16\
\15\ See n. 9 and 12, above.
\16\ See n. 27, below.
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In connection with the June 1995 proposals on permitting the use of
abbreviated financial statements in documents delivered to
investors,\17\ comment was solicited on whether the increasing
availability of disclosure through electronic media warrants
reassessment of the current overall regulatory framework.\18\ Any
comments received on the June 1995 proposals will be evaluated and
appropriate action will be considered. By issuing this release in the
interim, however, the Commission intends to assist issuers and other
market participants in using electronic media to comply with the
current regulatory scheme.
\17\ Release No. 33-7183 (June 27, 1995) [60 FR 35604].
\18\ See Section II.B to Release No. 33-7183.
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II. Use of Electronic Media
A. General
The federal securities statutes do not prescribe the medium to be
used for providing information by or on behalf of issuers, or by or on
behalf of third parties with respect to issuers.\19\ The Commission
believes that delivery of information through an electronic
[[Page 53460]]
medium generally could satisfy delivery or transmission obligations
under the federal securities laws.
\19\ But see n. 12, above.
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The federal securities laws, among other purposes, seek to promote
fair and orderly markets by requiring the disclosure of material
information that enables investors to make informed investment and
voting decisions. The extent to which required disclosure is made, as
opposed to the medium for providing it, should be most important to the
analysis of whether sufficient disclosure has occurred under the
securities laws. An electronic medium would not provide an adequate
means for the delivery of required disclosure, and thus not serve the
statutory purposes, if the medium does not permit effective
communication to investors or is practically unavailable.\20\
\20\ Electronically delivered documents must be prepared,
updated, and delivered consistent with the provisions of the federal
securities laws in the same manner as paper documents. Regardless of
whether information is delivered through paper or electronic means,
it should, of course, convey all material and required information.
If a paper document is required to present information in a certain
order, then the electronic document should convey the information in
substantially the same order. For example, in an audio or video
prospectus, the information required to be on the cover page of a
paper prospectus pursuant to Item 501(c) of Regulation S-K [17 CFR
229.501(c)] (e.g., red herring language) must be among the first
information presented through the audio or video media.
Information need not be provided solely through one medium. For
example, the Commission anticipates that, for practical reasons,
many proxy solicitations would continue to be delivered only in
paper by an issuer, while that issuer may choose to deliver other
documents, such as an annual report to shareholders (``annual
reports'') through electronic means.
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The Commission believes that the question of whether delivery
through electronic media has been achieved is most easily examined by
analogy to paper delivery procedures. The Commission would view
information distributed through electronic means as satisfying the
delivery or transmission requirements of the federal securities laws if
such distribution results in the delivery \21\ to the intended
recipients of substantially equivalent information as these recipients
would have had if the information were delivered to them in paper
form.\22\ As is the case with paper delivery, there should be an
opportunity to retain a permanent record of the information.
\21\ Under the various federal securities statutes and rules,
there are differing delivery obligations depending upon the context
of the requirements. This release does not alter these requirements.
\22\ Issuers and other persons required to satisfy delivery
requirements should consider establishing record-keeping or other
procedures to evidence satisfaction of applicable requirements
through electronic means. Presumably, such procedures would be
analogous to comparable procedures followed when a paper document is
delivered.
Those providing information also should take reasonable
precautions to ensure the integrity and security of that
information, regardless of whether it is to be delivered through
electronic means or paper, so as to ensure that it is the
information intended to be delivered.
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B. Guidance Regarding Electronic Delivery
The Commission believes that the analysis of whether an electronic
communication is delivered or transmitted for purposes of the federal
securities laws should be determined in accordance with the preceding
discussion. In making such determination with respect to information
communicated, in particular, over the Internet, through on-line
services, or through analogous computer networks, the Commission
believes that the following concepts discussed in this section reflect
issues that should be considered in determining whether applicable
statutory requirements have been satisfied.
This release is intended to provide guidance and a degree of
certainty regarding the manner in which electronic delivery can be
achieved. An issuer or other party that structures its delivery in
accordance with the principles and examples set forth below can be
assured that it is satisfying its delivery obligations under the
federal securities laws. The Commission wishes to emphasize, however,
that the factors discussed below are not the only factors relevant to
determining whether the legal requirements pertaining to delivery or
transmission of documents have been satisfied. If an issuer or third
party develops a method of electronic delivery that differs from those
discussed below, but provides assurance comparable to paper delivery
that the required information will be delivered, that method may
satisfy delivery or transmission obligations. The ultimate
responsibility for satisfying the applicable statutory requirements
remains with the issuer or other party to whom the law assigns the
responsibility.
Notice. When an issuer delivers a paper document through the postal
mail, the investor will most likely be made aware that new information
exists and that the investor might have to take some action within a
certain period of time. The Commission believes that those providing
electronic information should consider the extent to which the
electronic communication provides timely and adequate notice to
investors that information for them is available and, if necessary,
consider supplementing the electronic communication with another
communication that would provide notice similar to that provided by
delivery in paper. If an electronic document itself is provided--for
example, on computer disk, CD--ROM, audio tape, videotape, or e-mail--
that communication itself should generally be sufficient notice. If the
document is provided on an Internet Web site, however, separate notice
would be necessary to satisfy the delivery requirements unless the
issuer can otherwise evidence that delivery to the investor has been
satisfied or the document is not required to be delivered under the
federal securities laws.\23\
\23\ For example, in an offering, notice of an updated or final
prospectus and/or the updated or final prospectus itself need not be
sent at all, through any means, to persons who have received an
electronic preliminary prospectus, but to whom securities are not
expected to be sold. Of course, the final prospectus would have to
be delivered, through electronic means or otherwise, to those
investors to whom securities are sold.
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Access. When a document is delivered through the postal mail, a
recipient generally is provided with access to the required disclosure.
The Commission believes that recipients who are provided information
through electronic delivery should have comparable access;
consequently, the use of a particular medium should not be so
burdensome that intended recipients cannot effectively access the
information provided.\24\ Moreover, as is the case with a paper
document, a recipient should have the opportunity to retain the
information or have ongoing access equivalent to personal
retention.\25\
\24\ For example, if an investor must proceed through a
confusing series of ever-changing menus to access a required
document so that it is not reasonable to expect that access would
generally occur, this procedure would likely be viewed as unduly
burdensome. In that case, delivery would be deemed not to have
occurred unless delivery otherwise could be shown.
There are some circumstances where burdensome procedures may be
appropriate. See Example 48.
\25\ In many cases, the investor will be able to download the
document from the electronic medium, which is sufficient to satisfy
this need.
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If disclosure is made available by posting it on the Internet,
making it available through on-line services, or making it available by
similar means, the document should be accessible for as long as the
delivery requirement applies.\26\
\26\ For example, after a paper preliminary prospectus has been
provided, issuers make the most recent version of the prospectus
available to all persons to whom they expect to sell. If an issuer
posts electronically a preliminary prospectus on its Web site, the
prospectus should be updated to the same degree as paper and be
available to all persons to whom the issuer expects to sell
securities in reliance on the electronic delivery of the prospectus.
It likely would not be sufficient to show effective delivery if the
information was merely posted for a brief period of time and then
taken off the Web site, absent some other showing that delivery of
the updated prospectus actually had occurred. In the case of a
continuous offering, the prospectus should remain available for as
long as the issuer will rely on its delivery through the electronic
system. Annual reports should be available electronically for a
sufficient length of time for delivery to be satisfied. In the case
of proxy soliciting materials regarding the election of directors,
investors might reasonably expect the proxy soliciting materials and
annual report to be available on the Web site until their votes have
been cast and the meeting adjourned.
[[Page 53461]]
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Finally, because of possible system failures, computer
incompatibilities, and those cases, for example, where consents are
used in connection with the delivery of information electronically and
the person providing the consent revokes it, a necessary precaution
given the current state and use of communications technology is that
issuers must be able to make available paper versions of documents
delivered in an electronic medium. Specifically, the Commission
believes that, as a matter of policy, where a person has a right to
receive a document under the federal securities laws and chooses to
receive it electronically, that person should be provided with a paper
version of the document if any consent to receive documents
electronically were revoked or the person specifically requests a paper
copy (regardless of whether any previously provided consent was
revoked).\27\
\27\ This policy would not preclude an issuer from structuring
its offering as one that will be made only through electronic
documents. However, companies conducting initial public offerings
must consider prospectus delivery requirements for secondary market
trading under Securities Act Rule 174 [17 CFR 230.174].
Further, if a potential investor makes it known that the receipt
of information through electronic means by that person is no longer
to be relied upon by the issuer (for example, due to the revocation
of a consent previously given), then the issuer would not be able to
rely on the electronic delivery of information subsequently to
provide information to such person. If such subsequent information
is required to be provided under the federal securities laws to such
person because, for example, the person is now a shareholder and is
entitled to receive a proxy statement then, absent some alternative,
the issuer would be required to deliver the information through
paper.
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C. Evidence To Show Delivery
Providing information through postal mail provides reasonable
assurance that the delivery requirement is satisfied. The Commission
believes that issuers and others 28 providing electronic delivery
of information should similarly have reason to believe that any
electronic means so selected will result in the satisfaction of the
delivery requirements. Examples of procedures evidencing satisfaction
of the delivery requirements include: (1) obtaining an informed consent
from an investor to receive the information through a particular
electronic medium 29 coupled with assuring appropriate notice and
access, as discussed above; (2) obtaining evidence that an investor
actually received the information, for example, by electronic mail
return-receipt or confirmation of accessing, downloading, or printing
(see example 36); (3) disseminating information through certain
facsimile methods (see example 32); (4) an investor's accessing a
document with hyperlinking to a required document (see examples 15 and
35); and (5) using forms or other material available only by accessing
the information (see examples 31 and 33).
\28\ For example, broker-dealers, banks, associations and other
fiduciary entities may have delivery obligations to forward proxy
soliciting materials and annual reports to shareholders under
Exchange Act Rules 14b-1 and 14b-2 [17 CFR 240.14b-1 and 240.14b-2].
See Example 29.
\29\ If a consent is used, the consent should be an informed
consent. Recipients generally should be apprised: that information
provided would be available through a specific electronic medium or
source (e.g., via a limited proprietary system, or at a World Wide
Web site); of the potential that investors may incur costs (e.g.,
on-line time); and of the period during, and the documents for,
which the consent will be effective. For instance, investors should
be made aware of whether the consent extends to more than one type
of document. If an investor revokes a consent that extends to more
than one document, and consent is being relied upon by the provider
of the information to ensure effective delivery or transmission,
future documents should be delivered in paper unless the provider of
the information has an alternative mechanism for ensuring effective
electronic delivery. If not, it would appear likely that continued
electronic delivery, after revocation of the consent, would not be
considered to result in the investor's having access to the
information and, therefore, the delivery requirement would not be
satisfied.
Moreover, an issuer could rely on consents provided to an
underwriter, a brokerage firm or other service provider. Similarly,
an underwriter or brokerage firm could rely on a consent that its
customer provided to the issuer, and deliver that issuer's documents
through the same electronic medium.
Information may be provided through more than one medium; for
example, proxy statements and proxy cards might continue to be
delivered in paper while prospectuses might be delivered
electronically. If the recipient of information provides a general
consent to receive all documents electronically, it would be
permissible for a provider of information to attempt to accommodate
that request if the provider so desired.
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The Commission requests comment on these concepts and on whether
additional or alternative concepts would be more useful.
D. Examples
A series of examples is provided below to illustrate various
applications of the above concepts and to provide guidance in applying
them to specific facts and circumstances. The analysis required to
determine compliance with the delivery requirements is fact-specific,
and any different or additional facts might require a different
conclusion. Although this interpretation is effective immediately, the
Commission requests comment on whether other examples might be
appropriate for publication in a subsequent release.
Securities Act
(1) Company XYZ places its final prospectus on its Internet Web
site. Company XYZ then confirms by mail the sale of securities to
investors with a note stating that the final prospectus is available on
its Web site and giving the Internet location of the Web site.
Unlike paper delivery of a final prospectus where access to the
document can be presumed with delivery, not all investors purchasing
securities could be presumed to have the ability to access the final
prospectus via an Internet Web site. Therefore, absent other factors
such as express consent from the investor or an investor's actually
accessing the document on the Web site, the procedures described above
by themselves would not satisfy the delivery requirements under the
Securities Act.
(2) Company XYZ places its final prospectus on its Internet Web
site. Company XYZ then confirms by mail the sale of securities to those
investors who have consented to electronic delivery via the Company's
Internet Web site. A note on the bottom of the confirmation 30
states that the final prospectus is available on its Web site and the
Internet location of the Web site.
\30\ A separate document accompanying the confirmation also may
be used.
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This would satisfy delivery obligations, as it is reasonable to
presume that investors who have consented to delivery of the final
prospectus via an Internet Web site have the ability to access the
final prospectus once such investors are supplied with notice of the
Internet location of the Web site.
(3) While reviewing Company XYZ's preliminary prospectus on its
Internet Web site, Investor John Doe consented to delivery of all
future documents only through electronic mail, not by Web site access.
Company XYZ subsequently places its final prospectus on its Internet
Web site. Company XYZ then confirms by mail the sale of securities to
John Doe. A note on the bottom of the confirmation states that the
final prospectus is available on its Internet
[[Page 53462]]
Web site and the location of that Web site.
Again, absent other factors such as John Doe's actually accessing
the final prospectus on the Web site, the above-stated procedure of
Company XYZ would not by itself satisfy the obligations to deliver the
final prospectus to John Doe, as John Doe consented to delivery only by
electronic mail, not via an Internet Web site. If consent is to be
relied upon, the consent should indicate the specific electronic medium
or media that may be used for delivery.
(4) While reviewing Company XYZ's preliminary prospectus on its
Internet Web site, Investor John Doe consented to delivery of all
future Company documents by 3\1/2\'' floppy disk. Company XYZ places
its final prospectus on its Internet Web site. Company XYZ then
confirms by mail the sale of securities to John Doe. A 3\1/2\'' floppy
disk containing the final prospectus is included with the confirmation.
This would satisfy the obligation to deliver the final prospectus
to John Doe, since the Company included with the confirmation the final
prospectus on a 3\1/2\'' floppy disk.
(5) Investor John Doe consents to delivery of all documents
electronically via Company XYZ's Web site. Two days after consenting,
John Doe realizes that the online service he subscribes to does not
allow Internet access. John Doe notifies Company XYZ that he is
revoking his consent for any electronic delivery as he is not able to
access the Company's Internet Web site. Three weeks later, John Doe
receives in the mail a confirmation of his purchase of Company XYZ's
securities stating the Internet location of the Company's Web site
where the final prospectus can be obtained.
Since John Doe revoked his consent for electronic delivery, the
Company's notice to John Doe is insufficient because the Company knows
that its attempted delivery through the Internet will not satisfy the
statutory requirements for John Doe. A final paper prospectus would
have to be delivered to John Doe instead. Although a consent is
revocable at any time, revocation would have to be given to the company
or its agent a reasonable time before electronic delivery has commenced
for the company to be on notice that electronic delivery will not
satisfy the statutory requirements.
(6) Company LMN, a non-reporting issuer, commences an initial
public offering. Company LMN agrees with its underwriter, Brokerage
Firm DFG, to place its preliminary prospectus on the Company's Internet
Web site at least 48 hours prior to confirmations being sent. Investors
John and Jane Doe are both expected to purchase securities in the
Company's initial public offering. Both John and Jane Doe previously
provided Company LMN with consents for electronic delivery through the
Company's Internet Web site. Brokerage Firm DFG, pursuant to its
prospectus delivery obligation under Exchange Act Rule 15c2-
8(b),31 provides notice to John and Jane Doe at least 48 hours
prior to sending them confirmations.
\31\ 17 CFR 240.15c2-8(b).
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The underwriter may satisfy its obligation under Rule 15c2-8(b) to
John and Jane Doe by this means since both have consented to electronic
delivery through the Company's Internet Web site. Although consent was
not provided directly to the underwriter, the underwriter can rely on
the consent supplied to the Company. Similarly, had the consent been
provided to the underwriter, the Company could rely on it as well.
(7) Company ABC contracts with Company QRS, a computer technology
company, to place its preliminary and final prospectuses on Company
QRS's Internet Web site. Investor John Doe requests a copy of Company
ABC's preliminary prospectus via electronic mail from Company ABC's
underwriter, Brokerage Firm DFG. The underwriter sends a return
electronic mail to John Doe asking if he would like the electronic or
paper version of the preliminary prospectus. John Doe replies that the
electronic version via the Internet Web site would be preferable. The
underwriter then informs John Doe of the Internet location of Company
QRS's Web site where the preliminary prospectus for Company ABC is
available.
This would satisfy Brokerage Firm DFG's obligation to take
reasonable steps to furnish to any person making a written request for
a prospectus a copy of such prospectus.32 John Doe's request for
the electronic version via the Internet indicates that such electronic
delivery would be effective.33
\32\ Exchange Act Rule 15c2-8(c), (d) [17 CFR 240.15c2-8(c),
(d)].
\33\ In Release No. 34-35705 (May 11, 1995) [60 FR 26604], the
Commission stated that a managing underwriter may discharge its
obligations pursuant to Rule 15c2-8(g) or (h) by delivering a
prospectus (or any portion thereof) electronically to a
participating broker-dealer, if the recipient broker-dealer
expressly consents to delivery in such form, consistent with the
Brown & Wood letter. As reflected in that release and as further
discussed in this release and Examples 6 and 7 above, it is the
Commission's view that broker-dealers may use a variety of means to
satisfy the prospectus delivery obligations of Rule 15c2-8,
including electronic delivery.
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(8) Company XYZ sends the final prospectus via electronic mail to
those investors that previously had requested delivery by electronic
mail.
The Company would meet its delivery obligation with this procedure.
(9) Company XYZ places a preliminary prospectus on its Internet Web
site. After a material amendment to the registration statement, it is
determined that recirculation of an updated prospectus will be required
prior to effectiveness. Company XYZ updates the preliminary prospectus
on its Web site.
The Company need only send notice of the update to those investors
who are expected to purchase securities in the offering (or takes other
measures to deliver the information to those investors). There is no
need to send notice to individuals who are not expected to purchase
securities in the offering.
(10) Company XYZ places its final prospectus on its Internet Web
site. Its underwriters mail confirmations of sales to all purchasers.
At the same time the confirmations are mailed, the underwriters send
via electronic mail notice of the location of the Internet Web site
where the final prospectus is available. Notice is sent to all
investors who had consented to electronic delivery via an Internet Web
site and who provided their electronic mail addresses for purposes of
being notified. To those investors that did not provide an electronic
mail address but did consent to electronic delivery of the final
prospectus, the underwriters mailed the notice of the location of the
Internet Web site with the confirmation.
As the notice made investors aware of the availability and location
of the electronic document, the delivery requirement would be
satisfied.
(11) Company XYZ posts its final prospectus for sale of its common
stock on its Internet Web site. Company XYZ's stock is traded on the
New York Stock Exchange (NYSE). The NYSE requests 300 paper copies of
Company XYZ's final prospectus pursuant to Securities Act Rule
153.34 Rather than sending 300 copies of its final prospectus to
the NYSE, Company XYZ provides the NYSE with notice of its Internet Web
site, where the final prospectus can be accessed and downloaded.
\34\ 17 CFR 230.153.
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This would be insufficient delivery under Securities Act Rule 153.
Company XYZ must supply the 300 paper copies to the NYSE. The NYSE must
be in the position to provide paper copies of Company XYZ's final
[[Page 53463]]
prospectus because there is no reasonable expectation that delivery
would otherwise be satisfied with regard to investors who do not use
any electronic means to receive information. The NYSE would, however,
satisfy its delivery obligations with respect to any investor who
received delivery of the information through electronic means.
(12) Company XYZ places its preliminary prospectus on its Internet
Web site. Upon effectiveness of its registration statement, the Company
decides to deliver a term sheet pursuant to Securities Act Rule 434.
The term sheet, however, will not be placed on the Company's Web site,
but will be delivered in paper format with confirmation of the sale to
all investors.
Delivery of a mixed medium final prospectus would satisfy delivery
obligations. Generally, if investors received the preliminary
prospectus electronically, issuers are encouraged to deliver all
documents that constitute the final prospectus in electronic format.
However, confirmations cannot be furnished electronically unless the
Commission has specifically approved such delivery.35
\35\ See n. 12, above.
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(13) Company XYZ wants to deliver to investors a CD-ROM version of
its prospectus. The CD-ROM version includes within the prospectus a
movie illustrating the Company's operations. Investors viewing the CD-
ROM prospectus would not have to exit the prospectus in order to view
the movie, as the movie is actually a part of the prospectus.
While Company XYZ may include the movie as part of the prospectus,
it would need to file with the Commission as an appendix to the
prospectus the script of the movie and a fair and accurate narrative
description of the graphic or image material just as it would have to
supplementally provide to the Commission scripts and descriptions of
such material in sales material.
(14) Company XYZ places a copy of its final prospectus on its
Internet Web site. The electronic final prospectus will remain there
throughout the period for which delivery is required. Company XYZ also
places supplemental sales literature on its Internet Web site. Both the
sales literature and the prospectus can be accessed from the same menu,
are clearly identified on, and appear in close proximity to each other;
36 the supplemental sales literature may be accessed before
viewing or downloading the prospectus.
\36\ In this example, the prospectus is accessible on the same
menu as the supplemental sales literature; consequently, the
existence of the prospectus and its location are readily
ascertainable by the investor viewing the sales literature.
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Sales literature, whether in paper or electronic form, is required
to be preceded or accompanied by a final prospectus.37 In this
example, the prospectus would accompany the sales literature since
investors can access both the prospectus and sales literature from the
same menu. The sales literature and final prospectus should appear in
close proximity to each other on the menu. For example, the sales
literature should not be presented on the first page of a menu while
the final prospectus is buried within the menu.
\37\ Section 5(b) of the Securities Act.
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(15) Company XYZ places its sales literature in a discussion forum
located on the Internet World Wide Web. The sales literature contains a
hyperlink to the Company's final prospectus. While viewing the
literature the individual can click on a box marked ``final
prospectus,'' and almost instantly the person will be linked directly
to the Company's Web site and the final prospectus will appear on the
person's computer screen.
Sales literature, whether in paper or electronic form, is required
to be preceded or accompanied by a final prospectus. The hyperlink
function enables the final prospectus to be viewed directly as if it
were packaged in the same envelope as the sales literature. Therefore,
the final prospectus would be considered to have accompanied the sales
literature. Consequently, the placing of sales literature in a
discussion forum on a Web site would satisfy delivery obligations
provided that a hyperlink that provides direct access to the final
prospectus is included.
(16) Company XYZ places a preliminary prospectus on its Internet
Web site and provides direct access via a hyperlink to a research
report on the Company written by ABC Corporation, a registered
brokerage firm. The investor reviewing the preliminary prospectus can
click on a box marked ``ABC's research report'' and the investor will
be linked to the brokerage firm's Web site where the research report is
available.
The hyperlink function provides the ability to access information
located on another Web site almost instantaneously. This direct and
quick access to ABC's research report would be similar to the Company
including the paper version of the research report in the same envelope
that it is using to mail the paper version of the preliminary
prospectus to potential investors. During the waiting period, the
Company may make offers only through the use of a preliminary
prospectus,38 whether in paper or electronic format; therefore,
its use of the research report under these circumstances would not be
permissible.
\38\ Section 5(b) of the Securities Act.
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(17) Company XYZ places its final prospectus on its Internet Web
site. The Company then mails sales literature to individuals for whom
delivery through the Internet Web site was effective (regardless of
whether the individuals consented to delivery). Similarly, Brokerage
Firm ABC mails Company XYZ sales literature to its customers for whom
delivery through the Internet Web site was effective (regardless of
whether the individuals consented to delivery). In the forepart of
Company XYZ's sales literature is notice of the availability and
Internet Web site location of its final prospectus.
The mailing of sales literature to these individuals is
permissible, provided that notice of the availability of the final
prospectus and its Internet Web site location accompanies or precedes
the sales literature. When notice is included within sales literature,
it should be in the forepart of the literature and clearly highlighted
to make investors aware of the availability and location of the final
prospectus.
(18) Company XYZ places a tombstone advertisement complying with
Securities Act Rule 134 39 on its Internet Web site.
\39\ 17 CFR 230.134.
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This would be permissible, provided that the advertisement
otherwise complies with Rule 134.
(19) Company XYZ files a registration statement with the
Commission. The Company then places a ``tombstone'' advertisement in
accordance with Securities Act Rule 134 in the Wall Street Journal. In
the advertisement the Company includes the name and address of the
underwriter from whom a paper prospectus can be obtained as well as the
location of its Internet Web site where an electronic prospectus can be
obtained.
This inclusion of an electronic address for obtaining the materials
in this ``tombstone'' advertisement would be permissible under Rule
134. (Similarly, an advertisement made pursuant to Rule 14a-2(a)(6)
40 indicating the availability of proxy soliciting materials and
the location of an Internet Web site where electronic proxy soliciting
materials could be obtained would be permissible.)
\40\ 17 CFR 240.14a-2(a)(6).
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(20) Company XYZ wants to raise $5 million by selling its common
stock in a private placement pursuant to
[[Page 53464]]
Securities Act Rule 506 of Regulation D. The Company places its
offering materials on its Internet Web site, which requires various
information from a person attempting to access the materials to be
provided to the Company prior to displaying the offering materials.
The placing of the offering materials on the Internet would not be
consistent with the prohibition against general solicitation or
advertising in Rule 502(c) of Regulation D.41 Where prospective
purchasers have been otherwise located without a general solicitation,
a proprietary computer service could be used to deliver required
disclosure documents.
\41\ 17 CFR 230.502(c). In Release 33-7185 (June 27, 1995), the
Commission solicited comment on the question of whether the
prohibition against general solicitation in Regulation D offerings
should be reconsidered.
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(21) Company XYZ wants to raise $5 million by selling its common
stock in a private placement pursuant to Rule 506 of Regulation D to
certain individuals who have been located without a general
solicitation. The Company transmits the offering materials via
electronic mail addresses provided by these persons.
This would not be inconsistent with the offering restrictions in
the rule.
(22) Company XYZ pays John Doe $10,000 to write a report about the
Company and post the report on the Internet. John Doe writes the report
and places it on the Growth Companies Investment Bulletin Board located
on the Internet. The report does not disclose the $10,000 that the
Company paid John Doe.
The Securities Act requires that the $10,000 compensation paid by
Company XYZ to John Doe be disclosed in the report, regardless of
whether it is in electronic or paper form.42
\42\ Section 17(b) of the Securities Act.
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Exchange Act
(23) Company XYZ places its annual report and proxy soliciting
materials on its Internet Web site. The Company then sends notice to
all its record holders that its annual report and proxy soliciting
materials are available on its Internet Web site along with the
Internet location of the Web site and a telephone number that
shareholders may call to request a paper copy.
Similar to Example (1), a company should not presume that all
record holders have the ability to access the annual report and proxy
soliciting materials via an Internet Web site. Therefore, absent other
factors such as a consent from, or actual access by, a Company
shareholder, posting of the annual report and proxy soliciting
materials via the Company's Internet Web site would be insufficient to
constitute delivery to all record holders. The Company, however, may
place the materials on its Web site, but in this instance, it also
would need to furnish paper copies of the materials to its record
holders.
(24) In January 1995, Company XYZ places a copy of its final
prospectus on its Internet Web site. The prospectus will remain there
throughout the period for which delivery is required. Prior to viewing
the final prospectus, Investor John Doe provides an express consent to
the delivery of the prospectus and all future documents related to the
offering via Company XYZ's Web site. Investor John Doe subsequently
purchases the securities. In connection with its May 1995 annual
meeting, Company XYZ places proxy soliciting materials on its Web site
and places an advertisement in the Wall Street Journal indicating that
its proxy materials are now available on its Web site.
This advertisement by itself, even coupled with the express consent
that related to the offering documents, is insufficient for the company
to assume that it has delivered its proxy statement to Investor John
Doe. Although John Doe had provided consent to receiving documents
electronically, there is no reason to believe that notice provided in
the Wall Street Journal would make John aware of the availability of
the proxy materials. Company XYZ must provide more direct delivery or
notice to John Doe of the proxy materials. Notice by publication in a
newspaper or on a Web site or bulletin board is insufficient.
(25) In September 1994, John Doe, a shareholder in Company XYZ,
requests all future corporate communications including proxy statements
and annual reports to shareholders (``annual report'') to be delivered
electronically through the Company's Internet Web site. The consent
form states that Company XYZ expects that its annual report and proxy
materials for its annual meeting will be available on its Web site on
April 1, 1995. On April 1, 1995, the Company places its annual report
and proxy soliciting materials on its Web site.
Unlike the delivery of paper annual reports and proxy soliciting
materials, where the mere appearance in the mail of such materials
places the shareholder on notice within close proximity to the time
when shareholder action is requested, the advance request in this
example, without more, may not be close enough in time to the requested
action to be effective. However, if the Company reasonably expects for
other specific reasons, such as a history of communications with that
shareholder, that the shareholder would have effective delivery of the
information through the Web site, then the procedure could be
acceptable.
(26) Record holder Jane Doe consents to delivery of all documents
via Company XYZ's Web site. On April 1, 1995, Company XYZ provides
notice to Jane Doe that its annual report and proxy materials are
available on its Web site for its annual meeting scheduled to be held
on May 5, 1995. On April 5, 1995, Jane Doe notifies the Company that
her computer is broken and requests a paper copy of the annual report
and proxy materials.
Because Jane Doe's notice to the Company indicates that electronic
delivery will be ineffective, the Company should provide Jane Doe with
paper copies of the annual report and proxy materials within a
reasonable time of her request. She does not need to withdraw her
consent in order to receive the paper copies.
(27) Company XYZ places its quarterly report to shareholders and
Forms 8-K on its Internet Web site and advertises the location of its
Web site in the Wall Street Journal. The Company takes no other action
to deliver these materials to shareholders.
This would be permissible, since there generally is no requirement
to deliver such materials to shareholders at all.
(28) Company XYZ places its annual report and proxy soliciting
materials for the election of directors on its Internet Web site and
provides notice to all record holders that previously had consented to
electronic delivery via the Company's Web site. The record holders are
instructed to print the proxy card, execute the proxy and then mail it
back to the Company.
This would be consistent with the proxy rules.
(29) Brokerage Firm ABC solicits its customers who are beneficial
owners of Company XYZ to determine whether they would like to receive
Company XYZ's annual report and proxy soliciting materials
electronically via the Internet rather than in paper. The Brokerage
Firm then informs the Company that 100 beneficial holders would like to
receive the materials electronically and 200 beneficial holders would
prefer paper materials.
The Company provides the Brokerage Firm with the location of its
Internet Web site where the materials are posted and copies of its
paper documents for the 200 beneficial owners who do not wish to
receive the electronic delivery.
[[Page 53465]]
The Brokerage Firm then forwards the notice of the location of the
electronic materials to those beneficial holders who consented to
receive electronic delivery and forwards the paper materials to those
who did not.43
\43\ Exchange Act Rule 14b-1. This example also is applicable to
delivery by banks and other entities pursuant to Rule 14b-2.
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This would be consistent with the proxy rules.
(30) Company XYZ wishes to produce its annual report on videotape
and CD-ROM. The videotape and CD-ROM will contain all the material
information disclosed in the glossy annual report. Before distributing
the Company's annual report, the Company sends a letter asking its
shareholders whether they would be interested in receiving the
Company's annual report on videotape or CD-ROM instead of paper. The
Company then sends the videotape version of its annual report to its
shareholders who wish to receive the videotape and the CD-ROM version
to those shareholders who wish to receive the CD-ROM. The paper glossy
annual report is sent to those shareholders who do not wish to receive
either electronic format.
The federal securities laws do not preclude the delivery of a
document through different media.
Mutual Funds
The Commission is aware that investment companies, particularly
open-end investment companies (``mutual funds'' or ``funds'') have been
active in using electronic means to communicate with their shareholders
and prospective investors.44 Given the extent to which funds have
embraced the new technologies, the Commission believes that it is
appropriate to include the following additional examples, which are
tailored to the fund industry. Unless otherwise noted, however,
investment companies other than mutual funds and other corporate
issuers or third parties may use these examples for guidance as well.
\44\ See E. Savitz, ``Let A Thousand Web Site Bloom,'' Barron's,
June 26, 1995, at 50.
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Examples
(31) A fund sends an e-mail to a recipient with a prospectus
attached. The prospectus file includes an application form. The
recipient fills out the form and mails it with a check to the fund.
Delivery of the prospectus may be inferred from the recipient's use
of the form (provided the fund can identify it as coming from the
electronically transmitted prospectus).
(32) A current prospectus is faxed to a potential investor who has
requested the prospectus and provided the phone number of the fax
machine.
This transmission satisfies the prospectus delivery requirements.
(33) A current prospectus and an application are faxed to a
potential investor. The investor did not request the fax, but the
sender knows the investor's fax machine phone number.
If the investor completes and mails in the application form
included in the faxed prospectus, delivery of the electronic prospectus
may be inferred.
(34) A fund sends an unsolicited e-mail with a prospectus attached
in one file, and supplemental sales literature in a separate file. The
investor can access the sales literature and the prospectus with equal
ease.
The fund may send the supplemental sales literature in this
fashion.45 Electronic delivery of the prospectus may be inferred
even if the prospectus is not accessed. This would be analogous to an
investor receiving by mail a prospectus and supplemental sales
literature in the same envelope and electing to review the sales
literature, but not the prospectus.
\45\ Sections 2(10)(a) and 5(b) of the Securities Act.
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(35) A fund posts its supplemental sales literature and prospectus
on a file server for open access over the Internet. The supplemental
sales literature contains hyperlinks to the fund's electronic
prospectus and includes a caption referring the investor to the
prospectus. The investor would not need any additional software or need
to take burdensome steps to access the prospectus and thus has
reasonably comparable access to both documents. This system also
provides for the downloading or printing of prospectuses and sales
literature. An investor would not be required to retrieve, download, or
print a prospectus before viewing the sales literature. The system does
not require any consent by its users.
When a user accesses the supplemental sales literature, electronic
delivery of the prospectus can be inferred. This scenario is analogous
to an investor's selecting an envelope containing a paper prospectus
and supplemental sales literature from a display at an office of a
broker-dealer. This electronic delivery of the prospectus would be
sufficient for other purposes if the fund could reasonably establish
that the investor has actually accessed the sales literature or the
prospectus.
(36) A prospectus is made available through an on-line system that
allows users to access, download or print the entire prospectus and has
the capacity to track which users accessed, printed or downloaded which
documents.
A fund may rely upon a user's having accessed, printed or
downloaded a prospectus for the fund in order to deliver supplemental
sales literature or an order form for the fund or to establish delivery
of the prospectus in connection with a sale of fund shares.
(37) A fund's prospectus is available through an on-line service
that does not have the capacity for downloading or printing or to track
retrieval by a user. Investors do not provide any consent. The fund
mails or e-mails supplemental sales literature, or an application to
all of the service's subscribers, without including a prospectus.
Absent other factors that would indicate delivery of the
prospectus, the fund may not send the supplemental sales literature or
an application in this fashion, because it is not preceded or
accompanied by the prospectus for purposes of Section 2(10)(a) of the
Securities Act.46 This would be true even if the general
subscription agreement for the service contained a provision consenting
to receipt of documents, because such consent would not be sufficient
to give the fund reason to believe that delivery requirements relating
to the prospectus will actually be satisfied.
\46\ This is analogous to printing a fund prospectus in a
magazine of general circulation and subsequently mailing
supplemental sales literature to the magazine's subscribers, which
would not comply with Sections 2(10) and 5(b) of the Securities Act.
See William C. Lloyd (State of Wisconsin), June 7, 1990.
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(38) A server available through the Internet contains a fund's
prospectus and application form in separate files. Users can download
or print the application form without first accessing, downloading or
printing the prospectus; the form includes a statement that by signing
the form, the investor certifies that he or she has received the
prospectus. Logistically it is significantly more burdensome to access
the prospectus than the application form (e.g., the investor needs to
download special software before accessing the prospectus).
The statement in the form about receipt of the prospectus would not
by itself constitute electronic delivery of the prospectus, and the
application form is not evidence of delivery of the prospectus, given
the need to download special software before the prospectus can be
viewed.
(39) A server available through the Internet contains a fund's
prospectus. Users must download the prospectus to view or print it.
When a user downloads
[[Page 53466]]
the prospectus, the user receives the prospectus and an application
form in separate files. It is not significantly more burdensome to
access the prospectus than the application form (e.g., no additional
software is necessary to read either document, although the documents
may be in different formats).
If the fund can identify the application form as coming from the
electronic system, electronic delivery of the prospectus can be
inferred. The application form is evidence of delivery of the
prospectus.
(40) A fund's prospectus and application form are available through
an electronic system like that described in the preceding example,
except that the investor needs to download special software before the
prospectus and application form can be downloaded.
If the fund can identify the application form as coming from the
electronic system, electronic delivery of the prospectus can be
inferred. The application form is evidence of access to the prospectus.
(41) A fund sends an e-mail with an attached file containing an
advertisement satisfying the requirements of Securities Act Rule
482.\47\
\47\ Rule 482 [17 CFR 230.482] permits a registered investment
company or business development company to use an ``omitting
prospectus'' advertisement that contains only information the
substance of which is included in the company's Section 10(a)
prospectus.
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There is no prospectus delivery requirement in this context; a Rule
482 advertisement need not be preceded or accompanied by a prospectus.
(42) A fund transmits prospectuses over an electronic bulletin
board. Investors provide specific consent to receipt of the prospectus
through that system. The consent states that the current version of the
prospectus will be made continuously available and notice of material
amendments will be given by mail, e-mail, or some other manner
specifically directed to investors.
The prospectus delivery requirements will be satisfied with respect
to subsequent additional purchases by those investors.
(43) A fund places its prospectus on its Internet Web site and
revises the electronic version whenever the prospectus is modified. The
fund materially amends the prospectus and decides to send a postcard or
e-mail to persons to whom the prospectus has been delivered through
electronic means or who have consented to electronic delivery notifying
them of the availability of the amended prospectus.
This procedure provides for delivery of the prospectus to those who
have consented and to those to whom the prospectus has been previously
delivered (if the fund expects those persons to be able to receive the
amended prospectus). Alternatively, the fund could choose to satisfy
its prospectus delivery requirements by sending a paper copy of the
amended prospectus to investors in the fund, including investors who
consented to receive documents electronically.
(44) A fund places its prospectus on its Internet Web site.
Potential investor John Doe obtains access to the prospectus. John Doe
does not purchase shares in the fund. Subsequently, the prospectus is
amended.
The fund does not need to provide John Doe with notice of the
amendment.
(45) A fund puts proxy solicitation materials on the fund's server
on the World Wide Web. At the same time, the fund sends out postcards
or e-mail messages (with investors having consented to receive
notification by e-mail) giving notification that the proxy materials
are available. Investors have signed up to receive documents through
the server.
This would be consistent with the proxy rules.
(46) A fund transmits annual and semi-annual reports over an
electronic bulletin board system. The fund makes the current versions
of these materials available and informs investors who have consented
to electronic delivery of this fact. The fund provides separate
notification each time a shareholder report is posted by including the
notification in the preceding quarterly account statement or
shareholder newsletter. The notice informs investors of a date by which
the report will be available.
Notification to shareholders in a statement or newsletter delivered
within the preceding quarter would be considered sufficient notice
under Section 30(d) of the Investment Company Act \48\ and the rules
thereunder to constitute delivery.
\48\ 15 U.S.C. 80a-29(d).
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(47) A fund sends investors upon request a CD-ROM containing its
current prospectus and registration statement materials for the fund's
offering. This would provide delivery to investors.\49\
\49\ The analysis would be the same if an investor requests and
receives information on a diskette.
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(48) Prospectuses and other materials are available through a
computer server that requires users to obtain a user ID and password
before they can access documents on the system. The process for
obtaining the ID and password requires significant information from the
user and involves a delay of one day or even several days before the
user can access the system. After a user accesses a prospectus, a fund
sends him or her supplemental sales literature.
The process provides for delivery of the prospectus. Although the
system imposes burdens in the process for obtaining access to the
prospectus, these burdens are part of the process of providing access
to all the information, including the supplemental sales literature,
and not burdens upon access to the prospectus that is delivered.
(49) A prospectus is made available through an on-line system that
allows users to download the entire prospectus. The system does not
permit on-line viewing. An investor downloads the prospectus.
Assuming downloading, this method would satisfy the delivery
requirements because on-line viewing is not a prerequisite to
electronic delivery.
(50) A fund provides its prospectus, annual and semi-annual reports
through an Internet Web site. After one year, the fund decides to
terminate the Web site.
The fund may cease making its prospectus available through the Web
site as soon as the fund no longer plans to rely on electronic delivery
for satisfying its prospectus delivery requirements.\50\ Generally, an
annual or semi-annual report should be available until superseded by a
later report. The fund in this example could terminate the posting of
the most recent report when it is superseded by a new one, or earlier
if it provides a replacement paper copy to shareholders who received
the report electronically.
\50\ Continued sales of fund shares or delivery of sales
literature or application forms to investors who had received the
prospectus electronically would require delivery of paper prospectus
to those investors. Funds should consider whether paper prospectuses
should also be sent to other investors (e.g., recent purchasers).
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(51) The text of a fund's prospectus transmitted electronically on
a CD-ROM or an Internet Web site follows the sequence requirements of
Form N-1A.\51\ The prospectus includes a summary, which contains
hyperlinks that allow the investor to move to later sections of the
prospectus or to other documents (e.g., the fund's statement of
additional information or annual report). The summary is part of the
prospectus text that is subject to the form's sequence requirements.
\51\ 17 CFR 274.11A.
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Even though the hyperlinks allow an investor to choose to view
information out of sequence, the prospectus satisfies the requirements
of Form N-1A, because the main text does comply with the sequence
requirement.
[[Page 53467]]
(52) A fund places its prospectus (information required by Part A
of Form N-1A) on its Internet Web site. The fund does not put its
Statement of Additional Information (``SAI'') (information required by
Part B of Form N-1A) on its Web site; instead, it provides a paper copy
of its SAI free of charge to any person that requests it.
Delivery of a paper copy of an SAI does not prevent a fund from
satisfying its prospectus delivery requirements electronically.
III. Proposed Amendments
This release is intended to address practices involving electronic
delivery that are acceptable under current rules; no substantive
changes to filing or delivery requirements are contemplated here.
However, in order to make it clear that current rules should be read to
encompass electronic as well as paper dissemination, the Commission is
proposing in a companion release a number of technical amendments to
its rules.\52\
\52\ See Release No. 33-7234 for the text of those amendments.
Rule changes are proposed to be made to the following rules and
forms: Rule 253 of Regulation A [17 CFR 230.253]; Rule 420 of
Regulation C [17 CFR 230.420]; Rules 481 and 482 of Regulation C [17
CFR 230.481, 230.482]; Rule 605 of Regulation E [17 CFR 230.605];
Rule 304 of Regulation S-T [17 CFR 232.304]; Forms F-7 [17 CFR
239.37], F-8 [17 CFR 239.38], F-9 [17 CFR 239.39]; F-10 [17 CFR
239.40] and F-80 [17 CFR 239.41]; Rule 12b-12 [17 CFR 240.12b-12];
Rule 13e-3 [17 CFR 240.13e-3]; Rule 13e-4 [17 CFR 240.13e-4];
Schedule 13E-4F [17 CFR 240.13e-102]; Rule 14a-3 [17 CFR 240.14a-3];
Rule 14a-5 [17 CFR 240.14a-5]; Rule 14a-7 [17 CFR 240.14a-7]; Rule
14c-4 [17 CFR 240.14c-4]; Rule 14c-7 [17 CFR 240.14c-7]; Rule 14d-5
[17 CFR 240.14d-5]; Schedule 14D-1F [17 CFR 240.14d-102]; Schedule
14D-9F [17 CFR 240.14d-103]; and Rule 8b-12 [17 CFR 270.8b-12]; Rule
30d-1 [17 CFR 270.30d-1] and Rule 30d-2 [17 CFR 270.30d-2].
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IV. Electronic Filing Issues
As emphasized previously, this release addresses only issues
relating to electronic delivery of required disclosure documents and
does not affect the Commission's electronic filing requirements.
However, the Commission recognizes that the same rapid development of
electronic communications in recent years that has led to the issuance
of this release also has implications for how the Commission should
receive, process and make publicly available the documents filed with
it pursuant to the federal securities laws. Currently, filings are
accepted by the Commission only in the electronic formats prescribed by
the EDGAR system, or in paper, where the filer has not yet become
subject to mandated electronic filing requirements or where there is an
exemption pursuant to the electronic filing rules. While EDGAR may be
modified in the future to accept and process a broader array of
electronic formats, there may be ways to allow the filing of documents
prepared and delivered in other electronic media on a more expedited
timetable. As the Commission continues with its review of this area, it
intends to issue additional releases. Comment on the costs and benefits
to filers and the federal government with respect to these issues
should be provided by persons submitting comment on these issues.
V. Solicitation of Comment
Any interested persons wishing to submit written comments relating
to the views expressed in this release, or with respect to the rule
proposals in the companion release, are invited to do so by submitting
them in triplicate to Jonathan G. Katz, Secretary, U.S. Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C., 20549.
Commenters should refer to File Number S7-31-95. Comment is requested
not only on the specific issues discussed on the release, but on any
other approaches or issues that should be considered in connection with
facilitating the use of electronic media to further the disclosure
purposes of the federal securities laws. Comment is sought from the
point of view of both parties providing the disclosure, such as issuers
and those acting on behalf of issuers, and parties receiving and using
the disclosure, such as investors and shareholders. The Commission
further requests comment on any competitive burdens that might result
from the adoption of the proposals. Comments on this inquiry will be
considered by the Commission in complying with its responsibilities
under Section 23(a) of the Exchange Act.\53\
\53\ 15 U.S.C. 78w(a).
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List of Subjects in 17 CFR Parts 231, 241, and 271
Securities.
Amendment of the Code of Federal Regulations
For the reasons set out in the preamble, Title 17 Chapter II of the
Code of Federal Regulations is amended as set forth below:
PART 231--INTERPRETIVE RELEASES RELATING TO THE SECURITIES ACT OF
1933 AND GENERAL RULES AND REGULATIONS THEREUNDER
1. Part 231 is amended by adding Release No. 33-7233 and the
release date of October 6, 1995, to the list of interpretive releases.
PART 241--INTERPRETIVE RELEASES RELATING TO THE SECURITIES EXCHANGE
ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER
2. Part 241 is amended by adding Release No. 34-36345 and the
release date of October 6, 1995, to the list of interpretive releases.
PART 271--INTERPRETIVE RELEASES RELATING TO THE INVESTMENT COMPANY
ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER
3. Part 271 is amended by adding Release No. IC-21399 and the
release date of October 6, 1995, to the list of interpretive releases.
Dated: October 6, 1995.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-25391 Filed 10-12-95; 8:45 am]
BILLING CODE 8010-01-P
