Technoliability: Corporate websites, hyperlinks, and rule 10(b)-5

Washington and Lee Law Review, Winter 2001 by Miller, Mason

Ever think the day would come when the Internet and your phone worked as one to expand communications beyond all boundaries?1

I. Introduction - The Rise of the Internet Empire

In the new economy information age, the ability to capture and utilize the means of communication as a capital resource could mean the difference between a profitable and a bankrupt business enterprise.2 More than any other commercial activity, securities trading has recognized the potential opportunities this information revolution creates.3 This revolution has had two effects: the growth of corporate websites for the dissemination of information to the public,4 and the increased reliance by the public on the Internet as a means of information gathering and financial research.5 Concurrent with this growth has emerged the need to develop a regulatory structure adapted to the intricaCies of the Internet as it relates to securities laws.6 This Note addresses the potential liability under Rule 10b-5,(7) facing companies that operate webpages with hyperlinks.8 to analyst reports that contain inaccurate or misleading information.9

Part I of this Note discusses the growth of the Internet as a tool of financial information delivery by companies and the increasing reliance by the public on the Internet as a means of gathering such information.10 Part II of this Note provides a background to Rule 10b-5 and analyzes its potential application to a corporate website with a hyperlink to an analyst report containing misleading information.11 Part III then gives policy arguments in support of extending 10b-5 liability to the aforementioned situation.12 Part IV of this Note outlines potential strategies through which a company may avoid such liability yet maintain hyperlinks to analyst reports through the use of disclaimers and staleness provisions.13 Finally, Part V of this Note concludes that successful regulation must balance the interests of both investors and corporations.14

A. The Growth of the Corporate Website

Corporations are rapidly expanding the use of the Internet as a means to fulfill SEC disclosure requirements and otherwise to disseminate financial boa to the public.15 The use of a company webpage as a means of communication to the public arguably creates enormous savings in contrast to paper-based mailings and distribution.16 In IL June 1993 the entire world wide web consisted of only 130 websites.17 Three years later, the total number of webpages had grown to over 650,000, and this number continues to rise exponentially.18

A large proprtion of the Internet now is dominated by corporate home pages.19 Today, according to the National Investor Relations Institute, approximately ninety percent of all publicly traded companies in the United States have launched their own corporate websites.20 Practitioners have published manuals instructing attorneys on how to create a home page for their corporate clients.21 How many of these corporate websites are being accessed by the public for the purposes of gathering financial information concerning potential investment decisions remains a question.

B. The Internet and the Public

Even more striking than the ing use of the Intemet by corporations is the growing reliance on the Internet as a means of financial research by the public.22 Moreover, recent research indicates that by 2001 there will be

approximately 9.3 million investment accounts handled directly over the Internet.23 In pursuit of these members of the online investing public, over 150 brokerages are now available on the Internet.24

The public attraction to online investing is enormous. Internet investors have the opportunity to receive access to free and inexpensive investment information.25 Moreover, investing on the Internet provides the public lower transaction costs than traditional brokers,26 twenty-four hour access to account information,27 and portfolio tracking services.28 Given these two trends, the growth of the number of Internet users combined with the expanding number of corporate home pages, it is clear that the regulation of corporate disclosure policies over the Internet will become increasingly important.29

II. The Traditional Duty to Correct Misleading Statements

A. Background to Rule IOb-5 and SEC Anti-Fraud Regulation

The primary mechanism used by the SEC to regulate fraud with respect to informal (or "soft") communications between a company and the public is Rule10b-5.(30) Promulgated in 1942, Rule 10b-5 mirrors Section 17(a) of the

1933 Act31 except that Rule 10b-5 extends to misstatements occurring in connection with either "a purchase or sale of any security," while Section 17(a) of the 1933 Act focuses only on fraudulent sales or offers to sell.32 The SEC has utilized the broad language contained in Rule IOb-5 in a variety of antifraud contextS.33 Moreover, the Supreme Court has recognized a private right of action implied within Rule 10b-5.(34) Although limited in scope in recent years, the Rule 10b-5 implied remedy remains a powerful tool for class-action suits against public corporations.35