*161 The Internet is usurping the role of traditional intermediaries in many channels of product and service distribution. This "disintermediation" is occurring in a broad range of industry sectors because the more direct access between a provider and consumer of goods and services, facilitated by the Internet, results in greater economic efficiency and customer convenience. For example, traditional intermediaries in the financial markets, such as brick- and-mortar brokerage firms, are facing immense pressure from companies like E*Trade that operate on-line.

The long-accepted role of another breed of intermediary, the Wall Street research analyst, is now also under pressure. Recent publicity surrounding the release of information during road show presentations and selective disclosure to *162 research analysts highlights a growing concern that financial analysts enjoy unfair privileges in their access to information. [FN1] This concern has culminated in the SEC's newly proposed Regulation FD addressing selective disclosure. [FN2]

Information conveyed to analysts during a quarterly conference call, or communicated orally to a room full of institutional investors on a public offering "road show," is often qualitatively better, and more timely, than that available to the average individual investor in a company press release or SEC- filed disclosure document. By "better," I mean more likely to contain the type of information former SEC Commissioner Breeden called the most valuable information investors could have about a company: forward-looking information. [FN3]

Forward-looking information, such as comments signaling a positive or negative trend in financial outlook, moves the price of stock. And in today's high price/earnings multiple environment (which, in the case of many new Internet issues, means high price-to-next year's revenue projection multiple), the financial stakes have never been greater.

Preferential disclosure of forward-looking information undermines the premise of our system of full and fair disclosure, creating an investor world with two castes: those in the know and those not. It also tends to make more formal disclosures, such as press releases and SEC-filed documents, a kind of secondary material in terms of what really matters to investors. In response to these concerns, the SEC has suggested new rules in its proposed Regulation FD (an abbreviation for "fair disclosure"), which are designed to combat the selective disclosure of material information. [FN4] However, these rules may backfire if the risk of a securities lawsuit compels companies to limit themselves to the disclosure of only the most conservative, and correspondingly the least meaningful, forward-looking information.

Traditional Disclosure Practices

Concerning Forward-Looking Information

The use of financial intermediaries to filter information and distribute it to investors evolved in an era when access to timely information was far more limited than it is today. Traditionally, forward-looking disclosures by corporate management have not been provided to individual investors through press releases and SEC-filed reports. Rather, such information has been disclosed, if at all, through financial analysts who hear it in quarterly conference calls, or, in the case of public stock offerings, during oral road show presentations. In the current disclosure environment, individual investors might eventually obtain forward-looking information through analyst reports or other services compiling analysts' expectations, but this necessarily happens well after the analysts and their institutional customers have been briefed.

Aspects of these exclusionary practices are unavoidable. For example, it is simply not feasible for the management of a public company to be available for phone calls from all shareholders, prospective investors and other interested parties. On the other hand, forward-looking information conveyed during an organized conference call with analysts or a road show presentation could be widely disseminated through a press release or a Web site posting. However, the easy discoverability of such disclosures, and the attendant risk of liability resulting from a securities lawsuit, has made companies reluctant to choose this path.

The Disclosure Dilemma

To understand why companies disclose more meaningful forward-looking information during road shows or to analysts, pretend for a moment that you are the Chief Financial Officer of a promising company about to go public. Your investment bankers are helping you prepare the road show presentation. An essential part of this presentation, they tell you, is ensuring that analysts and institutional investors understand your financial model and business and financial *163 outlook. Why? Because your company will be valued and measured by comparing your forecasted earnings and/or revenue against those of comparable public companies and applying an appropriate multiple.

Meanwhile, back at the printer, your securities lawyers are busily completing the prospectus. Theoretically, it seems that these most critical, oral road show disclosures should have a prominent place in your primary written disclosure document. However, your lawyers have advised you against including forecasts in the prospectus for at least three reasons:

1. Notwithstanding the adoption of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), [FN5] securities lawsuits are at an all-time high, and forward-looking statements are precisely the type of statements around which securities complaints alleging fraud are crafted when forecasts do not materialize. [FN6]
   
   
2. The safe harbor for forward-looking statements, adopted as part of the Reform Act, is unavailable for statements made in connection with an initial public offering. [FN7]
   
   
3. Unlike oral road show statements, statements in the prospectus can give rise to personal liability of directors and others under Section 11 of the Securities Act of 1933. Similar liability concerns explain why many forward-looking statements made during quarterly analyst conference calls, such as "ballparking" the estimates for the quarter, do not typically show up in the more widely disseminated press release.

While some companies have opened their road shows and analyst calls to a broader range of investors, many others, concerned about liability for the comments made, have not. Few companies engaged in public offerings have included the type of forward-looking statements found in road show presentations in their prospectuses, where Section 11 liability lurks. This is particularly true in IPOs, where, as noted above, the safe harbor from liability for such statements is not available.

Ironically, these very exclusionary practices designed to stave off liability may actually expose management to charges of illegal selective disclosure--a form of insider trading (or more specifically, "tipping")--should the information disclosed in more private settings (such as phone calls with analysts) be deemed material. [FN8] Moreover, the SEC would regard a company's failure to publicly disclose known trends that are reasonably likely to materially impact financial results as a violation of the company's obligation to include such forward-looking disclosures in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of its periodic reports and/or registration statements. [FN9] This could subject issuers and their management to the risk of an SEC enforcement action--a risk exemplified by the actions against the Caterpillar and Sony companies. [FN10]

Leveling the Playing Field

Until the advent of the Internet, few seemed to challenge the long-standing practices associated with road shows and analyst calls. But, as the Internet has opened the channels of information to individual investors, the marketplace and the SEC have grown less tolerant of the traditional inequalities in accessing forward-looking information.

In today's world, an individual investor sitting at the kitchen table with a computer and a high-speed Internet connection can quickly access up-to-the- minute business news, press releases, research reports, analysts' estimates, stock quotes, SEC reports and even, in an increasing number of cases, analyst conference calls and road show presentations. Individual investors can also trade stocks quickly and cheaply, all without contacting a traditional intermediary. Financial analysts have played, and will continue to play, an important role in providing information and research to the market. However, with individual investors now able to mimic the conduct of large institutional investors in so many ways, it is no longer necessary to rely solely on analysts for the dissemination of forward-looking information.

It appears increasingly likely that both market factors and heightened SEC scrutiny will force a reexamination of traditional disclosure practices concerning forward-looking information. Recently, *164 the SEC delayed the initial public offering of Webvan after a member of the financial press publicly disclosed road show information not included in the prospectus. [FN11] In October 1999, Richard Walker, the SEC's enforcement director, echoed concerns expressed earlier by SEC Chairman Levitt when he stated that the SEC "has been looking carefully at selective disclosure from companies to analysts." [FN12] Walker indicated that the SEC has grown concerned that investors have been excluded from teleconferencecalls between companies and their analysts, who get advance hints about quarterly earnings. On December 15, 1999, in the most significant recent development in this area, the SEC proposed Regulation FD, a set of rules designed to prevent companies from selectively disclosing material information.

The Effect of Regulation FD

According to Chairman Levitt, Regulation FD "would require that when a company discloses material information, it does so publicly rather than limiting initial access to that information to a privileged, select few. And, when a company learns that it has made an unintentional selective disclosure, it must make that information available to the public in short order." [FN13]

Under Regulation FD, an issuer can effect "public disclosure" through one of several methods: filing the information with the SEC, issuing a press release, or providing public access (such as by phone or Webcast) to the conference call or meeting at which the information will be disclosed. In a statement accompanying the SEC's press release, Chairman Levitt also encouraged corporations to honor the spirit of Regulation FD by opening up analyst conference calls to all investors, and by placing those calls on the Internet where broad access can be guaranteed at minimal cost.

Regulation FD is an important step in providing equal, fair access to information. Corporate management should be encouraged to provide forecasts and other forward-looking information, whether viewed as material or not, in prospectuses, press releases, periodic reports and other disclosure documents. Road shows and conference calls should be made accessible to all investors. In addition to adopting Regulation FD, the SEC should consider modifying rules proscribing written offering materials prior to the effective date of a public offering so that posting road show information on a Web site is not viewed as "gunjumping" if a prospectus is delivered or otherwise easily accessible. This could be accomplished through a rule-making proposal similar to SEC Rule 134 under the 1933 Act.

Securities Reform Must Complement the Goals of Regulation FD

As the framers of the Reform Act understood, encouraging or requiring disclosures is only part of the solution in eliminating market disparities in access to forward-looking information. The risk of a securities lawsuit strongly impacts disclosure practices and, as noted above, such lawsuits are being filed at a record pace. Without effective mechanisms to protect and therefore encourage forward-looking statements, corporate management will be facing a serious dilemma: the marketplace and the SEC will require uniform disclosure, but greater forward-looking disclosures heighten the risk of a lawsuit.

If pleading and safe harbor reforms enacted under the Reform Act prove ineffective in reducing abusive securities lawsuits, new rules should be considered to accomplish these objectives. For example, because financial forecasts are just as essential, or more so, in the IPO context where there is no existing analyst research available, the safe harbor for forward-looking information should be extended to protect comments made orally during IPO road show presentations and in prospectuses. Any erosion of the Reform Act's enhanced pleading standards by the courts should also be watched carefully.

If companies are not confident that their responsible efforts at broader disclosure will be protected, they will likely take a more guarded approach and disclose only more conservative, less forward-looking (and therefore less meaningful) information about future prospects--even during traditional road shows and analyst calls. The goals of the Reform Act--reducing abusive securities lawsuits and encouraging and protecting forward-looking statements-- must be achieved before the disintermediation of meaningful forward-looking information can be realized.

FOOTNOTES:

FNa1. Steven E. Bochner is a partner at the law firm of Wilson Sonsini Goodrich & Rosati in Palo Alto, California and a member of the Board of Advisors of WALLSTREETLAWYER.COM. This article represents only his views, and not necessarily the view of his firm. The author gratefully acknowledges the assistance of Christopher La Chance, an associate at Wilson Sonsini Goodrich & Rosati.

FN1. See, e.g, Susan Pulliam, "SEC Investigates Possible Disclosure at Abercrombie," WALL ST. J., Nov. 16, 1999, at C22 [hereinafter "Abercrombie Investigation"]; Scott Herhold, "'Quiet Period' Hotly Discussed," SAN JOSE MERCURY NEWS, Oct 18, 1999, at E1 [hereinafter "'Quiet Period' Hotly Discussed"], Thor Valdmanis and Tom Lowry, "Wall Street's New Breed Revives Inside Trading," WALL ST. J., Nov. 4, 1999, at B1.

FN2. See SEC Rel. No. 34-42259 (Dec. 20, 1999), 1999 WL 1217849

FN3. See Joint Explanatory Statement of the Committee of Conference, H.R. Rep. 369, 104th Cong, 1st Sess at 42-43 (1995) ("Statement of Managers") ("Understanding a company's own assessment of its future potential would be among the most valuable information shareholders and potential investors could have about a firm.") (statement of Richard Breeden, Chairman, SEC).

FN4. See supra note 2.

FN5. See Private Securities Litigation Reform Act of 1995, Pub L No. 104- 67, 109 Stat. 737 (1996)(codified as amended in scattered sections of 15 U.S.C.).

FN6. See Joseph A. Grundfest et al., "Securities Class Action Litigation in Q1 1998: A Report to NASDAQ from the Stanford Law School Securities Class Action Clearinghouse," June 2, 1998, available at:
http://securities.stanford.edu/research/reports/19980602q1.html.

FN7. See 15 U.S.C. § 77z-2(b)(2)(C) (1997).

FN8. See, e.g., S.E.C. v. Stevens, 48 S.E.C. 739, 1991 WL 296537 (S.E.C. 1991); "Abercrombie Investigation," supra note 1, at C22.

FN9. See Item 303 of Regulation S-K under the 1933 Act

FN10. See In re Sony Corp and Sumio Sano, 67 S.E.C. 1609, 1998 WL 439898 (S.E.C. 1998); In re Caterpillar, Inc., 51 S.E.C. 147, 1992 WL 71907 (S.E.C. 1992).

FN11. See "'Quiet Period' Hotly Discussed," supra note 1, at E1; George Anders and Robert Berner, "Webvan to Delay IPO in Response to SEC Concerns," Wall St. J., Oct. 7, 1999

FN12. Arthur Levitt, Remarks at "S.E.C. Speaks" Conference, "A Question of Integrity: Promoting Investor Confidence by Fighting Insider Trading," Feb. 27, 1998, available at  http://www.sec.gov/news/speeches/spch202.txt .