Multimedia Disclosure

• What is a "multimedia SEC document"?
• Can companies use multimedia in their prospectuses and other SEC documents?
• Why would companies want to use multimedia in a SEC document?

• When is multimedia related to an offering required to be part of a statutory prospectus?
• How is multimedia made part of a statutory prospectus?
• Why is multimedia considered a "writing"?
• When is multimedia related to an offering not required to be part of a statutory prospectus?
• Can multimedia be part of a red herring, but not part of the final prospectus?
• How does the SEC staff review and comment on multimedia disclosure?
• What types of disclosure issues arise more frequently with multimedia compared to textual disclosure?
• Does a company need to deliver paper copies of multimedia prospectuses to the exchange on which its securities are listed?

• Can companies deliver different versions of prospectuses and other SEC documents to different investors - some with multimedia and some without?
• Can an investor demand that it receives a particular version of a SEC document that a company has?
• Can a company force an investor to accept delivery of a multimedia prospectus in an offering?
• Can a company force an investor to accept delivery of a multimedia proxy statement or glossy annual report?
• Why would companies want to create different versions of the same document?
• What types of disclosure issues arise more frequently when a company creates multiple versions of a document?

• How can a company file a multimedia document on EDGAR?
• Does a company need to retain a copy of a Web site version of a SEC document?

• What is a "Web site prospectus"?
• Which companies have used Web site prospectuses that contained multimedia?
• Which companies have used Web site periodic reports or glossy annual reports that contained multimedia?

• What is a CD-ROM prospectus or annual report?
• Why would a company want to put its SEC document on a CD-ROM?
• Why is it likely that companies will not continue to put their SEC documents on CD-ROMs?
• Which companies have put their SEC documents on CD-ROMs?

A. Understanding Multimedia SEC Documents

What is a "multimedia SEC document"?

Any document that contains some multimedia - such as audio, video, animation or graphics - that is required to be filed with the SEC or delivered to investors.

A document can even include "streaming" audio or video. "Streaming" technology allows small amounts of data to be transmitted in a sequential order - as new data "streams" in, it replaces the existing data (so that no complete document is available at any one point in time).

Can companies use multimedia in their prospectuses and other SEC documents?

Yes. The SEC allows companies to use multimedia in any document that is required to be delivered to investors or filed with the SEC - subject to consideration of whether the use of multimedia raises antifraud concerns. See more @ multimedia disclosure issues.

Note that filing multimedia documents with the SEC is a little tricky and requires special preparation - since EDGAR cannot accommodate most multimedia. See more @ filing multimedia with the SEC.

Source: Example 13 of Release 33-7233 (October 6, 1995) illustrates the ability of companies to use multimedia in a SEC document.

Why would companies want to use multimedia in a SEC document?

Multimedia can be a superior marketing tool compared to a staid text document.

Pure text has the liability-oriented tone of a legal document - which is not reader friendly. With multimedia, an investor may be more drawn to the disclosure - and may be able to more fully understand its message.

On the other hand, multimedia should not overwhelm the text so that the overall disclosure is unbalanced and misleading. See more @ multimedia disclosure issues.

A drawback to multimedia use in Web site documents is that many investors do not have broadband connections - for investors with 28 or 56 kbps modems, it can take unbearably long to access multimedia from a document posted on the Web, particularly video and other graphics.

B. Multimedia Use During an Offering

When is multimedia related to an offering required to be part of a statutory prospectus?

If it's used during the waiting period. During this period, the only permissible "writings" are a statutory prospectus or a tombstone ad - and multimedia is considered a "writing." See more @ multimedia as a writing.

In other words, multimedia - that would be considered sales literature if used the post-effective period - is required to be a part of a statutory red herring if used during the waiting period.

Source: Section 5 of the Securities Act of 1933 sets forth how companies can and can't market their offering during the waiting period (i.e. the period between filing a registration statement with the SEC and that registration statement being declared effective by the SEC staff). Section 10 prospectuses and Rule 134 tombstone ads are permitted - any other "written" prospectuses are not permitted to be used during this period. Note that Section 2(10) of the Securities Act defines "prospectus" broadly to include any "writings" that offer any security for sale.

How is multimedia made part of a statutory prospectus?

By filing it in a registration statement - either as a script in the prospectus or as an appendix at the end of the prospectus. See more @ filing multimedia documents with the SEC.

Source: Rule 304 of Regulation S-T explains how multimedia should be filed on EDGAR. If an appendix is used, it should be placed at the end of the prospectus, as noted in footnote 309 of Securities Act Release 33-6977 (March 18, 1993).

Why is multimedia considered a "writing"?

Multimedia arguably is a "writing" by connecting the dots through a myriad of provisions under the federal securities laws.

Section 2(9) of the Securities Act of 1933 defines a "writing" to include "printed, lithographed, or any means of graphic communication." "Graphic communication" is defined in Rule 405 under Regulation C as "magnetic impulses or other forms of computer data compilation."

Although the SEC has not provided an interpretation of the definition of "other forms of computer data compilation," it arguably covers any communication over a network, including all Internet activity. The SEC recently stated that all electronic communications are "writings" - but the SEC staff subsequently indicated that live, "real-time" audio or video are considered oral communications in the business combinations context (and archived audio and video "written" communications).

The characterization of electronic communication impacts how companies invoke the safe harbor for forward-looking information - since the safe harbor distinguishes between oral and written communication. See more @ invoking the safe harbor for Webcast analyst conference calls.

Source: The SEC recently interpreted "written communications" in footnote 37 of the Regulation MA adopting release, Release 33-7760 (January 24, 2000). Subsequently, the SEC staff in Question 2 of the Division of Corporation Finance's Manual of Telephone Interpretations (Third Supplement July 2000) indicated that "live" real-time audio or video used in connection with or relating to a business combination do not have to be filed as "written communications" under Rule 165 - but that delayed or archived Webcasts would have to be filed as "written communications" under Rule 425.

When is multimedia related to an offering not required to be part of a statutory prospectus?

If it's used during the post-effective period - multimedia can be used in sales literature, which is not required to be filed with the SEC (except for limited circumstances such as real estate transactions).

A statutory Section 10 prospectus must be delivered with or before the multimedia sales literature is provided. This "accompanied or preceded" requirement can be satisfied if sales literature is linked to an electronic statutory prospectus (under the SEC's guidance, the Section 10 prospectus is deemed to be delivered with the sales literature). See more @ electronic delivery of prospectuses.

A company still can voluntarily include multimedia as part of its final statutory prospectus if it wishes - but the higher standard of Section 11 liability applies, compared to Section 12(a)(2) liability for sales literature.

Source: Section 5(b)(2) of the Securities Act of 1933 requires that a Section 10 prospectus accompanies or precedes sales literature. In some cases, sales literature is required to be submitted - but not filed with the SEC staff. For example, under Item 19(d) of Guide 5, real estate companies must submit sales literature to the SEC staff prior to use. In addition, under Rule 418 of Regulation C, the SEC staff can always request supplemental information, including sales literature.

Can multimedia be part of a red herring, but not part of the final prospectus?

Probably - but any differences between a red herring and a final prospectus should be clearly immaterial. Otherwise, the differences may raise antifraud concerns.

The SEC has not formally addressed the issue of whether companies can use different disclosure (or mediums of providing the disclosure) between a red herring and a final prospectus - but based on a number of theories (including that companies are allowed to use differing versions of prospectuses), it would appear permissible.

However, the SEC staff likely would closely look at the differences in disclosure to ensure that the information provided did not materially change. To minimize the risk that would be caused by any differences between a red herring and a final prospectus, one solution would be to include a script in the final prospectus of the multimedia used in the red herring.

A company may want to omit multimedia from a final prospectus that was in the red herring to be able to print it more quickly - or to enable investors to download it more quickly if it's delivered electronically.

Source: Although not directly addressed, Example 7 in Release 33-7288 (May 9, 1996) can be used to argue that it supports the concept that companies can use differing preliminary and final prospectuses.

How does the SEC staff review and comment on multimedia disclosure?

No differently than for text disclosure - the SEC staff attempts to limit its comments to substantive disclosure issues.

However, a company should consider providing an advance script of a multimedia document to the SEC staff before creating the multimedia - since SEC comments can require costly development changes to a multimedia document.

The SEC staff has stated that it will cooperate and pre-review multimedia - a company considering using multimedia in an offering should contact the Assistant Director in the SEC's Division of Corporation Finance assigned to its industry to ask for this pre-review.

Source: In Section II.A and footnote 21 of Release 33-7233 (October 6, 1995), the SEC emphasized that electronic media's impact on the federal securities laws is procedural only. The SEC's Web site has an outdated directory of the industries assigned to each Assistant Director at www.sec.gov/news/cfrorg98.htm.

What types of disclosure issues arise more frequently with multimedia compared to textual disclosure?

Matters that tend to be hyperbole, insupportable or unbalanced.

Companies should consider whether they have:

Does a company need to deliver paper copies of multimedia prospectuses to the exchange on which its securities are listed?

Yes. Companies are required to provide paper copies of prospectuses to its exchange for redelivery purposes - and underwriters still must meet their secondary market delivery requirements in an initial public offering.

If a company is conducting an "electronic only" offering, it doesn't need to prepare special prospectuses for these purposes - it can simply deliver whatever paper version it otherwise has available. Even copies of an Edgarized SEC document will suffice.

Source: Rule 153 requires issuers and underwriters to deliver paper copies of prospectuses to any exchange that effects transactions in the issuer's securities. Rule 174 sets forth the underwriter's secondary market delivery requirements in an initial public offering. In footnote 27 and Example 11 of Release 33-7233 (October 6, 1995), the SEC confirmed that these obligations do not change due to electronic delivery.

C. Delivery of Different Versions of a SEC Document

Can companies deliver different versions of prospectuses and other SEC documents to different investors - some with multimedia and some without?

Yes. The SEC allows companies to create multiple versions of the same document, each with differing content - so long as each version meets the applicable legal requirements.

A company can have an unlimited number of versions - and each version can have different text, graphics, audio, or spreadsheets. This provides companies with a great deal of flexibility. See more @ the risks of different disclosure in different versions.

Note that each version must disclose that another version exists - but this does not mean that investors are entitled to get a copy of the other version.

Source: The SEC's multiple version guidance is in Example 7 of Release 33-7288 (May 9, 1996).

Can an investor demand that it receives a particular version of a SEC document that a company has?

Not really - the only version that an investor can demand is a paper copy. Investors cannot demand to get a copy of a multimedia version - or a particular multimedia version (if multiple multimedia versions exist).

Note that investors can access all versions of a document that a company has - by going to EDGAR on the SEC's Web site and reading the script of the multimedia in other versions, since companies are required to file scripts or appendices of all versions. Of course, reading a textual description of multimedia isn't quite the same as experiencing it "live."

Source: The SEC acknowledged that companies are not required to provide investors with access to each version of a document in footnote 67 to Release 33-7288 (May 9, 1996).

Can a company force an investor to accept delivery of a multimedia prospectus in an offering?

Sort of. The SEC allows companies to conduct "electronic-only" offerings - so that companies can condition their offers on investors consenting to electronic delivery.

However, after a company accepts an investor into its offering, the investor can always change its mind and ask for a paper copy. See more @ investor's ability to always ask for a paper copy.

Source: The SEC first clarified that an "electronic-only" offering can be conducted in footnote 16 of the Release 33-7233 (October 6, 1995) and then confirmed this position in the text related to footnote 109 of Release 33-7856 (May 4, 2000). The SEC requested comments on whether investors should be able to ask for paper delivery after they consent in Section II.D.4 of Release 33-7856 (May 4, 2000).

Can a company force an investor to accept delivery of a multimedia proxy statement or glossy annual report?

No. Unlike investors in an offering, a company does not have any discretion regarding whether it has to deliver these documents to stockholders - so investors can't be forced into accepting a multimedia document.

Stockholders are presumed to desire a paper version unless they consent to delivery of an electronic version - except this presumption can be reversed for certain types of employee-stockholders. See more @ delivery to employee-stockholders.

Source: Example 26 of Release 33-7233 (October 6, 1995) illustrates how most types of stockholders are presumed to desire a paper version of an SEC periodic report unless they consent to electronic delivery.

Why would companies want to create different versions of the same document?

To tailor different versions to the needs or desires of various types of investors.

For example, a version tailored to retail investors may be "dumbed down" to provide more explanatory disclosure than a version designed for institutional investors.

D. Filing Multimedia with the SEC

How can a company file a multimedia document on EDGAR?

Although each updated version of EDGAR accommodates more multimedia - it still cannot handle audio, video and some types of graphics (mainly due to system capacity limitations).

Instead, a script or fair and accurate description of the multimedia should be filed. This script or description can either be filed as part of the SEC document itself - or as an appendix at the end of the SEC document.

Note that a script must be filed as part of the registration statement - but is not required to be delivered to investors.

The SEC's "aircraft carrier" included a proposal to solve EDGAR's capacity limitations - that companies electronically file a script of any multimedia that could not be filed on EDGAR as well as manually file five copies of such multimedia documents in their original medium in the SEC's public reference room (one issue is how this would work with streaming - since the medium is ephemeral - see more @ what is "streaming"), so that the public could have access to the multimedia. It's likely that this proposal will not survive the gutting of the "aircraft carrier."

For five years, a company must retain a copy of a multimedia document that was not capable of being filed in its "native" format on EDGAR.

Source: Rule 304 of Regulation S-T explains how multimedia should be filed on EDGAR. If an appendix is used, it should be placed at the end of the prospectus as noted in footnote 309 of Securities Act Release 33-6977 (March 18, 1993). The SEC proposed that companies should make multimedia documents available in the SEC reference room in Section VII.B. of Release 33-7606A (November 13, 1998).

Does a company need to retain a copy of a Web site version of a SEC document?

Yes. If it contains any multimedia that can't be filed in its "native" format on EDGAR - the company is required to retain a copy for five years.

The copy should be kept in the format used - but if this is impractical, it's probably sufficient to retain either a printout of what it looks like when presented to investors or an electronic copy. Note that the SEC staff has not formally addressed this issue.

Source: Rule 304(c) of Regulation S-T sets forth the 5 year retention period.

E. Multimedia Prospectuses and Exchange Act Reports on Web Sites

What is a "Web site prospectus"?

A prospectus that is posted on a Web site or intranet.

Many Web site prospectuses consist solely of text with links to other content within the prospectus. Growing numbers of Web site prospectuses contain multimedia, principally graphics - not audio or video.

Trivia note: Two of the first Web site prospectuses were Berkshire Hathaway's 1996 Class B IPO and Yahoo's 1997 IPO.

Which companies have used Web site prospectuses that contained multimedia?

Directional Robotics' January 1997 self-underwritten IPO filed under Regulation A (SEC File No. 333-02356-LA). It was the first multimedia Web site prospectus, with audio and video - and was available in four languages!

Great Plains Software's May 1997 IPO (SEC File No. 333-22833) - the first multimedia Web site prospectus for an underwritten offering. From a table of contents, investors could link to any section of the prospectus, including video and audio parts of the prospectus which were entitled "Product Overview" and "Product Demonstrations." The "Product Overview" consisted of text and photographs with the ability to stream audio of a manager reading the text. The six "Product Demonstrations" had to be downloaded separately and consisted of a visual display of Great Plains' software products with a voice-over explaining how they work. Note that Great Plains did not use the Web site prospectus to satisfy delivery requirements - it still relied on paper. The paper prospectus contained a script of the multimedia as an appendix - thus, all investors had access to the same content, albeit in differing mediums.

During the past year, a number of companies (that have included E*Offering as a syndicate member in their IPO) have used "electronic road shows" that were part of the statutory prospectuses because they were used during the waiting period (although theoretically they weren't road shows by definition since they were part of the statutory prospectuses). These Web site prospectuses included a "Meet the Management" roadshow script as an appendix at the back of the prospectus - and from this textual script, investors could link to a multimedia version of the electronic road show. See more @ "roadshows" in statutory prospectuses.

Source: Pending and archived "Meet the Management" electronic road shows are available at E*Trade's E*Offering Web site at www.eoffering.com (although some of the links to the multimedia versions of road shows are inactive).

Which companies have used Web site periodic reports or glossy annual reports that contained multimedia?

Numerous companies have included bells and whistles that a paper version did not - including audio or video factory tours, product demonstrations and officer speeches.

For example, Microsoft posts its glossy annual report on its Web site in eleven different languages and presents its financial data in four different currencies.

F. SEC Documents on CD-ROMs

What is a CD-ROM prospectus or annual report?

A document contained on a CD-ROM - often with multimedia content.

Why would a company want to put its SEC document on a CD-ROM?

To be perceived as a tech-savvy company and to ensure that investors can easily display multimedia - accessing multimedia on a CD-ROM is much faster compared to how long it can take to access multimedia on the Web.

Why is it likely that companies will not continue to put their SEC documents on CD-ROMs?

They are costly to produce, engineer and distribute - particularly compared to putting their SEC documents on the Web.

Posting documents on the Web is more popular now - since investors increasingly have broadband connections that enable them to access multimedia faster.

Which companies have put their SEC documents on CD-ROMs?

Not too many companies have used CD-ROM prospectuses - and the handful of companies that put their glossy annual reports on CD-ROMs discontinued the practice within one or two years of their trials.

The following are examples of multimedia SEC documents that have been delivered: