*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
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:
- 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]
- 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]
- 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
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."
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
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.
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,
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:
FN7. See 15 U.S.C. § 77z-2(b)(2)(C)
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
FN13. See "Statement of Chairman
Arthur Levitt on Audit Committee Oversight, Selective Disclosure,
and Insider Trading," SEC Open Commission Meeting, Dec. 15,
1999, available at