Reprint permission from the November, 1996 issue of Crain's Small Business.
Securities lawyers and their capital-hungry clients are seeing irresistible opportunities on the Internet -- now that the Securities and Exchange Commission has approved ways to sell and trade stock and other securities over the World Wide Web.
The excitement began earlier this year when Spring Street Brewing Co., a New York-based micro-brewery, raised $1.6 million through an initial public offering (IPO).
Spring Street's IPO was executed on the company's Web site and, to the company's joy, none of the proceeds were shared with Wall Street underwriters.
Spring Street also instituted a Web-based bulletin board system for buyers and sellers to trade its stock, which let them monitor trading activity and review the company's most recent financial statements.
By approving the brewery's Web-based IPO, the Security and Exchange Commission confirmed that public offerings -- including the solicitation of investments; delivery of both preliminary and final prospectuses; and securities sales themselves -- can all be accomplished on the Internet.
What's more, net-based private placements, stock offerings to selected investors, have also been approved.
As a result, companies looking for wealthy and experienced investors may make generic solicitations via the Web.
Moreover, prospective investors who meet the minimum qualification requirements may be given access to a password-protected World Wide Web page to view private-placement offering documents.
Such qualified prospects are then allowed to invest without triggering a violation of the "general solicitation" and "general advertising" prohibitions that apply to unregistered, so-called "Reg D," offerings.
While the SEC recognizes the benefits of new electronic technology, it is sticking to its well-founded position that all the securities laws must be strictly followed when a company raises money over the net.
So, careful attention must be paid to the application of old and complex rules. A few illustrations prove the point.
- Suppose a company places its final prospectus on its Web site. The company 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.
Although access to a final prospectus is presumed with the delivery of a paper document, not all investors purchasing securities can be presumed to have the ability to examine a final prospectus via an Internet Web site.
For that reason, the Securities Act's deliver requirements won't be satisfied unless an investor expressly consents to Web-site delivery or actually reads the document on the Web site.
- Or, consider the company that places a copy of its final prospectus on its Web site. The electronic prospectus will remain there throughout the period for which delivery is required.
The company also places supplemental sales literature on its Web site.
Sales literature, whether in paper or electronic form, is required to be preceded or accompanied by a final prospectus.
Applying the rule, the SEC has determined that the sales literature and the final prospectus should appear in close proximity to each other on the same menu.
All arcane compliance issues aside, raising capital on the Internet is an option worth exploring.
Marc J. Lane is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University.