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Public companies should be wary of venturing onto Internet

Securities law struggling to keep up with the power of ideas floating in cyberspace

The Internet can make today’s public companies feel like both saints and sinners.

While the technology has allowed companies and a growing investment-savvy consuming public to communicate faster and more efficiently, the rapidly changing field of cyberspace securities is replete with potholes and pitfalls, said Bryn Vaaler, an associate professor of law who specializes in securities law.

As counsel for the Minneapolis, Minn., law firm Dorsey & Whitney, Vaaler, along with several of his colleagues, he authored the recent paper “secreg.com: Securities Law in Cyberspace,” one of a growing handful of academic looks into what Vaaler agreed was a still infantile field of study.

“It’s definitely growing,” he said. “People’s ideas are outpacing the regulators…It’s such a moving target.”

Because of that, public companies need to be mindful before venturing on the Internet, Vaaler said.

Nationally, online investing is in a state of profound growth, according to a widely-cited report by Forrester Research Inc., in Cambridge, Mass. According to Forrester, this relatively new investment medium will grow from its current level of about three million accounts to 14.4 million accounts by 2002. The size of assets managed will increase from $120 billion to $688 billion.

While consumers and others may find the Internet useful in obtaining once obscure disclosure documents on pubic companies thanks to the Securities & Exchange Commission’s EDGAR (Electronic Data Gathering, Analysis and Retrieval), the SEC is alsoin the process of furiously trying to manage the deluge of new questions and problems the medium has created for the companies themselves.

In his co-authored paper, Vaaler points out some of the early actions by the SEC in October 1995 and May 1996 regarding companies using electronic means to deliver information to such persons as brokers-dealers, current and potential investors and financial advisors to meet disclosure delivery requirements. Issues such as access, notice of receiving information and evidence of delivery were of concern.

The SEC has also responded to a growing number of requests from companies curious about regulatory infractions they might encounter by using the Internet. The SEC has responded to those in a number of no-action letters, Vaaler said, and cover such things as electronic road shows, general solicitation and advertising and even establishing its own Web site.

Vaaler said one of the most far-reaching areas to be impacted by the Internet will be how public companies communicate with their investors, broker-dealers and others. Thanks to the technology, many companies are now weighing the potential savings that could be realized by sending such things as annual reports, proxy statements, prospectuses and other regular communications through electronic means.

“Companies are really trying to make in-roads in going paper-less, and the Internet is going to help them do that,” Vaaler said.

Also, the Internet makes it possible for companies to now consider virtual shareholder meetings.

Already some companies are experimenting with using e-mail and telephones and personal identification numbers for shareholders permitting proxies using electronic transmission, Vaaler said, and the next step is to actually conduct annual meetings over the Internet.

“It’s really changing the way people think about shareholder relations,” he said. “The Internet is good for investor relations.”

But the Internet is also good for unsavory solicitors, the SEC has discovered, Vaaler said.

Because it can reach so many people in such a relatively quick period of time, criminals have wasted no time in finding ways to defraud unwitting investors.

“They’re even crooks on the Internet,” he said.

Subsequently, Vaaler said, high profile cases where thousands are unwittingly bilked could put a damper on what could be a very promising technology for the securities industry.

But at least one attorney, Jim Verdonik of Raleigh, N.C., said in a recent column for a Raleigh business publication, he believes that is exactly why the SEC will be so quick to act.

“Indeed, the SEC is more likely to take action against Internet fraud than fraud conducted by other means because of the high profile nature of the Internet,” he said.

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