As news broke this morning that Wired Ventures had pulled its much-anticipated IPO, speculation began circulating that a leaked memo written by the company's CEO may have had something to do with the cancellation. The Wall Street Journal reported that "tongues had been wagging over another issue Thursday night: namely, whether the company's chief executive may have been too noisy during the company's 'quiet period.'"
Wired denied that the memo, which found its way to the very public Internet, played any part in the action, saying that "the decision was based solely on market conditions." Federal regulations require companies to forego discussions beyond what is stated in the preliminary prospectus before they go public.
Whatever the case, the controversy raised serious questions about how such regulations can be enforced on a worldwide medium and whether information such as the Wired memo could constitute a violation of securities law.
Industry attorneys and investors agree that it is time that for the Securities Exchange Commission to step in and set some rules to address the issue.
One of the reasons the Internet has become an overnight success is because of its ability to allow anyone to instantly distribute information to the world. Ironically, however, it is this very advantage that can lead to problems for companies planning to make money on the medium through the public markets, as the information posted on the Net isn't always accurate or intended to be broadcast to the world.
Upon request, the company can distribute a preliminary prospectus, called a red herring, that discloses relevant information needed by an investor who plans to make a stock decision. But some companies may use the Internet as a new outlet to quietly promote themselves, testing the limits of the law, wittingly or not.
"We have people who survey the Internet in one way or another," said John Heine, deputy director of the SEC. Although the laws are not entirely unclear regarding informal information online, he said, four or five cases have involved the Net "in one way or another."
The SEC published guidelines on the issue last year, but some attorneys say they are already obsolete. Moreover, many question how federal regulators can possibly investigate all corners of a seemingly infinite medium.
"The most viable solution will probably be a combination of revisions to SEC rules and corporate policy," said Priscilla Bazan, an attorney who provides online legal counseling to corporations and CEOs.
Others echo her concerns. "It would seem that the SEC has to get involved because in some cases you have fraud in the marketplace, and that is what the SEC was set up to prevent back in the '30s," said Howard Kalt, a principal at Kalt, Rosen, and Associates.
Kalt's firm also has resorted to policing cyberspace itself to prevent misleading information on the Net. Last year, someone scanned in a bogus wire service a news story about one of Kalt's clients before its IPO. The firm caught the story four hours after it was distributed but was left with a lot of explaining to do.
"The story was meant to drive the stock up, and once the (misleading information) gets exposed, traders can sell short to make a bundle. It works both ways," Kalt said.
But the SEC isn't going to solve this problem on its own. Companies need to be more cautious when distributing memos during a quiet time, said Karl Groskaufmani, a securities attorney with Fried, Frank, Harris, Shriver & Jacobsen. "It's not just an SEC issue--it's an issue for companies to deal with when setting standards," he said.
During a quiet period, he said, companies should disseminate information to employees who have an absolute need to know. "Email gives employees--who don't need the information in the first place--the ability to transmit it at far greater lengths without thinking twice."