1999 WL 498545 (S.E.C. No - Action Letter)
 

July 14, 1999

MICHAEL HYATTE, ESQ.
SPECIAL COUNSEL
OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE
SECURITIES AND EXCHANGE COMMISSION
450 FIFTH STREET, N.W.
WASHINGTON, D.C. 20549
Re: Wit Capital Corporation: Section 5 of the Securities Act of 1933

Dear Mr. Hyatte: 
On behalf of Wit Capital Corporation ("Wit Capital") we request confirmation from the Staff of the Division of Corporation Finance (the "Staff") of the Securities and Exchange Commission (the "Commission") that the Staff would not recommend enforcement action under Section 5 of the Securities Act of 1933, as amended (the "Securities Act"), against Wit Capital if Wit Capital, other underwriting syndicate members, selected dealers, selling group members and other registered dealers were to follow the procedures described in this letter in connection with their participation in initial public offerings [FN1] as an underwriter, selected dealer, e-dealer^TM [FN2] or e-manager^TM. [FN3] We have described the procedures from the point of view of Wit Capital, but these will be equally applicable to other underwriters or selected dealers.

FN1. Wit Capital will not use the procedures outlined in this letter for follow-on or secondary offerings.

FN2. As discussed infra, an e-dealer^TM is a registered broker-dealer that agrees to purchase shares from Wit Capital in an offering and resell those shares to its customers through the Internet in compliance with the procedures described in this letter.

FN3. Wit Capital characterizes its role in an offering as e-manager^TM when Wit Capital acts in a sufficiently significant role as an underwriter in a registered public offering that Wit Capital's name appears on the cover of the prospectus and Wit Capital facilitates online distribution of shares in that offering.

 

We believe that these procedures will assure compliance with Section 5 of the Securities Act. We believe that they will provide to retail investors a clear means of understanding the process for participating in public offerings through the Internet. Further, and even more importantly, these procedures will significantly enhance investor protection by affording to retail investors the means to understand the process of participating in an offering of securities and to evidence their desire to participate in an offering at the time the investment decision is made. [FN4]

FN4. See SEC Release No. 33-7606A, 63 Fed. Reg. No. 233, p. 67174 (December 4, 1998) (the "Aircraft Carrier Release"), at p. 67223.
 

I. Background
A. Wit Capital's Business
Wit Capital is a broker-dealer registered under the Securities Exchange of 1934, as amended (the "Exchange Act"), engaged in general brokerage and investment banking activities. Wit Capital is a member of the National Association of Securities Dealers, Inc. (the "NASD"). [FN5] Wit Capital conducts business with its customers primarily through its general Internet Web site. The URL address of this general Web site is "www.witcapital.com." Through this general Web site, customers of Wit Capital can, among other things, open accounts; transmit orders for the purchase or sale of securities, including securities issued in registered public offerings and securities purchased and sold in the secondary market; communicate with Wit Capital; read Wit Capital's Rules and Procedures; and learn about specific public offerings in which Wit Capital is participating.
FN5. As an NASD member, Wit Capital is subject to the regulations of NASD Regulation, Inc. ("NASDR"), a subsidiary of the NASD. For purposes of simplification, we use the term NASD in this letter to refer to either the NASD or NASDR.
 

*2 Direct personal contact between customers and Wit Capital employees generally is limited to assisting customers with technical issues, such as how to connect to Wit Capital's Web site, or as a backup to electronic access in the event that the customer experiences operational difficulties or has questions regarding Wit Capital's procedures. Accordingly, many communications which are handled orally by the traditional broker-dealer are handled by Wit Capital through electronic communication. These include communications relating to the following: the gathering of information from customers for suitability and other purposes; the solicitation and receipt of orders from customers to purchase or sell securities; the solicitation of conditional offers from customers to buy securities in an offering; the transmission or receipt of offers to buy or sell securities; and communications that assist the customer in understanding the broker-dealer's business and facilitate the customer's transaction of business with the broker-dealer.

B. Wit Capital's Distribution of Shares in Public Offerings

Wit Capital has participated as either an underwriter or selected dealer in over eighty public offerings to date. As an underwriter, Wit Capital purchases shares from the issuer and resells the shares to its customers. [FN6] In all but two instances, Wit Capital's retention in an offering has been sold to its own customers. In two recent offerings, Wit Capital has sold shares not only to its own customers, but also to other dealers ("e-dealers^TM") who agreed to purchase shares from Wit Capital in the offering and resell those shares to their respective customers through the Internet. Wit Capital intends to include e-dealers^TM in offerings in the future. The participation of e-dealers^TM in an offering will be in accordance with, among other things, the terms and conditions of Wit Capital's e-dealer^TM agreement. Upon the granting of the relief requested in this letter, the e-dealers^TM would abide by the procedures described herein.

FN6. In some offerings, Wit Capital may be identified as a member of the selling group rather than an underwriter. In such cases, Wit Capital would purchase shares from underwriters in the offering rather than directly from the issuer.
 

C. Cul de Sacs Developed for Each Public Offering
Wit Capital will establish a separate area of its Web site (a "cul de sac") for each public offering in which it participates. The cul de sac for each offering will contain a Rule 134 notice for the particular offering, a copy of the prospectus for the offering and other Web pages as described in this letter. Attached as Exhibit A to this letter is a template for the Rule 134 notice. Attached as Exhibits B through M to this letter are templates for the various Web pages that will be included on a cul de sac. The layout and content of these Exhibits is representative of the layout and content of the cul de sacs that Wit Capital proposes to use for future public offerings.
*3 Simultaneously with, or shortly after, the printing of a preliminary prospectus for a public offering that is to be provided to customers for their use in evaluating whether to participate in the offering (commonly known as a "red herring"), Wit Capital will make available on the cul de sac for the offering a copy of the preliminary prospectus for the offering in electronic format (the "electronic prospectus"). The electronic prospectus will have the same content as the paper copy of the preliminary prospectus for the offering.
When the electronic prospectus has been made available on the cul de sac for the particular offering, Wit Capital will send an e-mail to its members [FN7] in accordance with Rule 134 notifying them of the offering and of the availability of the electronic prospectus for the offering (the "Notification E-mail"). The template for the Notification E-mail is set forth in Exhibit A. The content of Exhibit A is representative of the Notification E-mail that Wit Capital proposes to use in connection with future public offerings. The Notification E-mail will contain a hyperlink to a Gateway page on the cul de sac. The template for the Gateway page is set forth in Exhibit B. Like the Notification E-mail, the Gateway page will be worded to comply with Rule 134.

FN7. A "member" is a person who has provided an e-mail address to Wit Capital. Some members are also "customers" of Wit Capital, which means that they have opened accounts with Wit Capital. A member cannot participate in an offering, and Wit Capital cannot accept a conditional offer from that member for an offering, unless that member has opened an account with Wit Capital (i.e., become a "customer" of Wit Capital).

 

Members will be able to hyperlink from the Gateway page on the cul de sac for a particular offering to other Web pages within the cul de sac for the offering. [FN8] A member will be able to hyperlink at any time from any Web page on the cul de sac for an offering to any of the following pages on the cul de sac for that offering: Open Account (Exhibit H); Rules and Procedures (Exhibit I); FAQs (Exhibit J); Contact Us (Exhibit K); Join our Mailing List (Exhibit L); and the Gateway page (Exhibit B).

FN8. Text in the Exhibits which is in color indicates that an on-line viewer can click on that text to hyperlink to another Web page.

 

Certain other pages on the cul de sac for a particular offering will only be reachable by first navigating through other Web pages. For example, a member will not be able to reach the Prospectus Links page (Exhibit D), the Prospectus page (Exhibit E), the Pre-Conditional Offer page (Exhibit F) or the Conditional Offer page (Exhibit G) until the member has completed the Registration page (Exhibit C). In addition, a member will not be able to submit a conditional offer (Exhibit G) until the member has first opened an account with Wit Capital (Exhibit H). A member will only be able to reach the Conditional Offer page or the Prospectus page through the Prospectus Links page (Exhibit D). If at the Gateway page a member clicks on "Place Conditional Offer" or "Get Preliminary Prospectus," the member will be brought to the Registration page (Exhibit C). When a member completes the registration process (Exhibit C), the member will be brought to the Prospectus Links page (Exhibit D).
*4 The Registration page for Wit Capital members (Exhibit C) will require a member to enter his or her e-mail address or addresses. When a member has completed the Registration page (Exhibit C), the member will be brought to the Prospectus Links page (Exhibit D). At this point, the member may view the preliminary prospectus for the particular offering in PDF format, HTML format, or both, open an account with Wit Capital and place a conditional offer for shares in the offering. If a member selects a format for viewing the preliminary prospectus for the particular offering, the member will be brought to a Web page containing the preliminary prospectus for that offering in the format selected by the member (Exhibit E). If on the Prospectus Links page the member selects "Place a Conditional Offer," the member will be brought to a Pre-Conditional Offer page containing certain acknowledgments and warnings (Exhibit F) and then to a page through which the member will be able to enter a conditional offer for the offering (Exhibit G).
On the Pre-Conditional Offer page (Exhibit F), the member consents to electronic delivery of the prospectus by making the following affirmation: "I hereby affirm my authorization for Wit Capital to deliver certain communications electronically via e-mail as outlined in Section 2 of the Customer Account Agreement." The affirmation contains a hyperlink to Section 2 of the Customer Account Agreement which is located on the cul de sac for each offering (Exhibit M). Section 2 of the Customer Account Agreement contains a consent to electronic delivery of prospectuses. [FN9]

FN9. Wit Capital obtains this informed consent to electronic delivery in accordance with the requirements of the Commission's releases on the use of electronic media for delivery purposes. See "Use of Electronic Media for Delivery Purposes," Rel. No. 33-7233, 34-36345, IC-21399 (October 6, 1995); and "Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information," Rel. No. 33-7288, 34- 37182, IC-21945, IA-1562 (May 9, 1996).

 

If the member attempts to place a conditional offer but has not yet opened an account with Wit Capital at U.S. Clearing Corp. the clearing firm to which Wit Capital introduces accounts ("US Clearing"), the member will be brought to a Web page containing a notice that the member must open an account with Wit Capital prior to placing a conditional offer.
Wit Capital's account opening application (Exhibit H) will be included on the cul de sac for each offering. Wit Capital's account opening application includes various questions that assist Wit Capital in complying with various legal and regulatory requirements. For example, in the account opening process, customers are required to provide information regarding their affiliations with certain "restricted persons" as provided in the NASD's "Free-Riding and Withholding" interpretation. [FN10] Similarly, customers are required to provide information regarding their investment objectives, investing experience, annual income, liquid net worth and net worth excluding home.

FN10. IM-2110-1 of the NASD's Conduct Rules.

 

*5 When a member has completed the account opening process, and Wit Capital and US Clearing have accepted the member's account application, the member is brought to a Web page notifying the member that his or her account has been accepted. At this point, the member has become a customer of Wit Capital. The Web page notifying the customer that his or her account has been accepted contains a hyperlink to the customer's account agreement. In Section 2 of the customer account agreement, the customer consents to electronic delivery of documents, including prospectuses.
When a customer opens an account with Wit Capital, the customer must provide certain information regarding the customer's nationality and residency, investment objectives and affiliation with a registered broker-dealer or other "restricted persons" for purposes of the NASD's Free-Riding and Withholding interpretation. Wit Capital will use this information in determining whether to permit a customer to place a conditional offer for shares in a particular public offering. A customer whose nationality, residency, affiliation, or investment objectives does not satisfy Wit Capital's eligibility criteria for a particular offering and who attempts to place a conditional offer for that security, will be brought to a Web page notifying the customer that he or she is not eligible to participate in the offering. This notice specifies the reason that the customer's attempt to transmit a conditional offer has been rejected.
Members who want to place a conditional offer will be required to pass through the Pre-Conditional Offer page (Exhibit F) and then the Conditional Offer page (Exhibit G). Members who attempt to place a conditional offer, if they are customers of Wit Capital and are not restricted from placing a conditional offer pursuant to the restrictions described above, are brought to the Conditional Offer Verification page (Exhibit G1). The Conditional Offer Verification page provides for verification of the customer's conditional offer and contains various disclosures. [FN11] Wit Capital permits customers to place two types of conditional offers: the first type, similar to a limit order, specifies a maximum price per share the customer will agree to pay; the second type, similar to a market order, does not specify a maximum price. All conditional offers for initial public offerings received during the waiting period are treated as conditional offers to purchase within the expected price range. Wit Capital's subsequent handling of the conditional offer and communications with customers submitting conditional offers is discussed in detail in Section I.E. below.

FN11. These disclosures are described in more detail in Section I.E.4.(b) below.

 

In accordance with the requirements of Section 5 of the Securities Act and the Commission's releases on the use of electronic media for delivery purposes (the "electronic delivery releases"), [FN12] Wit Capital will make available on the cul de sac for each offering a copy of the preliminary prospectus for the particular offering (Exhibit E). We believe that the procedures proposed in this letter provide members access to the prospectus for an offering in a manner which is not in any way burdensome, in accordance with the requirements of the electronic delivery releases. Wit Capital will promptly make available on the cul de sac each amended preliminary prospectus that is being circulated to prospective investors. When an amended prospectus has been made available on the cul de sac for an offering, Wit Capital will send an e-mail notifying customers who have previously transmitted conditional offers to buy shares in the offering of the availability of the amended prospectus. The e-mail will provide hyperlink access to the amended prospectus. [FN13]

FN12. See footnote 9 above.

FN13. In accordance with Section 5 of the Securities Act, US Clearing sends final prospectuses to Wit Capital's customers who have purchased shares in an offering. US Clearing also sends confirmations of these transactions to Wit Capital's customers in accordance with Rule 10b-10 under the Exchange Act. Wit Capital also sends an e-mail to customers who have purchased shares in an offering that contains a hyperlink to the final prospectus for the offering.

 

*6 As indicated above, a member will be able to hyperlink at any time to any of the following Web pages on the cul de sac for a particular offering: the Open Account page (Exhibit H); the Rules and Procedures page (Exhibit I); the FAQs page (Exhibit J); the Contact Us page (Exhibit K); the Mailing List page (Exhibit L); and the Gateway page (Exhibit B). The content of the Open Account page and the Gateway page is described above; the Rules and Procedures page describes Wit Capital's Rules and Procedures relating to public offerings; the FAQs Web page contains responses to frequently-asked questions regarding participation in public offerings through Wit Capital; and the Contact Us and Mailing List Web pages enable a member to provide the member's mail and e-mail addresses and other information to Wit Capital.

D. Accessing the Cul-de-Sac Through Wit Capital's General Web Site

The home page to Wit Capital's general Web site (Exhibit N) contains various hyperlinks, including a hyperlink to a Web page (the "Look at New Issues" page) that lists initial public offerings and follow-on and secondary offerings in which Wit Capital is participating (Exhibit O). If, at the Look at New Issues page, a visitor clicks on the hyperlink for a particular offering, the visitor will be brought by hyperlink to the Gateway page of the cul de sac for that offering.
The cul de sac created for each offering is distinct from Wit Capital's general Web site. There will be no hyperlink from any of the cul de sacs to Wit Capital's general Web site; however, there will be a direct hyperlink from the listing of each offering on the Look at New Issues page on Wit Capital's general Web site to the Gateway page of the cul de sac for the particular offering. The Notification E-mail for a public offering will contain a hyperlink to the cul de sac for the particular offering but will not contain a hyperlink to Wit Capital's general Web site.
By limiting access to and navigation from the cul de sac, Wit Capital limits the information prospective customers can obtain to that which: (i) has been filed with the Commission as part of the public offering; (ii) is covered by Rule 134; and, (iii) relates to Wit Capital's procedures for such matters pertinent to purchasing shares in the offering through Wit Capital, such as opening an account or instructions for using the Web site. Persons accessing the cul de sac cannot obtain quotes, news or research concerning the subject securities or any other securities by direct hyperlink from the cul de sac.

E. Solicitation and Acceptance of Conditional Offers to Buy

1. Background

Wit Capital sells shares in public offerings to its customers through the process of soliciting and accepting conditional offers to buy shares in these offerings. Wit Capital proposes to solicit conditional offers from its customers and members and other persons during the waiting period of a particular offering, after the preliminary prospectus for the offering has been made available on its Web site (as noted in I.F.(iv) below, this is at the time the "red herring" preliminary prospectus becomes available). These conditional offers will then be accepted after the registration statement for the offering has been declared effective ("effectiveness") and the offering price has been established ("pricing"), subject to availability of shares. Thus far, Wit Capital has obtained from its customers affirmative reconfirmation of conditional offers to buy shares after the registration statement has been declared effective. For future offerings, Wit Capital proposes to obtain from its customers affirmative reconfirmation of all conditional offers to buy on a pre-effective basis, as described below. Pursuant to the e-dealer^TM agreements, Wit Capital will require that the e-dealers^TM also comply with these procedures.

2. Allocation of Shares on a First-Come, First-Served Basis

*7 Wit Capital anticipates that it will not always have a retention of shares sufficient to meet the demand from its customers or, if included, e-dealers^TM, for shares in a particular offering. Wit Capital's current policy is to allocate shares in an offering among customers of Wit Capital and the other e-dealers^TM on a modified "first-come, first-served" basis depending upon when the customer transmits to Wit Capital or the applicable e-dealer^TM a conditional offer to buy shares in the offering. [FN14] This general rule is subject to certain exceptions -- for example, Wit Capital may establish minimum and maximum share amounts for customers; in addition, Wit Capital, at the request of an issuer, may set aside a specified number of shares in an offering for certain categories of employees or customers of the issuer or other persons with an affinity relationship with the issuer. Any such directed share program will be described in the applicable prospectus in the "Plan of Distribution" section as required by Item 508 of Regulation S-K.

FN14. The modified first-come, first-served basis works as follows: the Notification E-mails for an offering will specify a time by which customers must place conditional offers in order to be included within the first group of Wit Capital customers and customers of e-dealers^TM to be allocated shares in the offering. Among this first group of customers, Wit Capital will allocate shares on a random basis. Customers who place conditional offers subsequent to the time specified in the Notification E-mail will be allocated shares in the offering on a first-come, first-served basis, but only after the allocation of shares to customers who have placed conditional offers prior to the time specified in the Notification E-mails. The foregoing allocation procedure is subject to certain provisos, including the following: (i) no customer will be allocated shares in an offering unless the customer affirmatively reconfirms his or her previously transmitted conditional offer in accordance with the procedures described in this letter; (ii) Wit Capital may establish certain minimum and maximum share amounts; and (iii) Wit Capital's policy is that it generally does not allocate more than 100 shares in an offering to any customer until all customers who have placed conditional offers to buy shares in the offering have been allocated 100 shares.

 

Wit Capital intends to extend this first-come, first-served policy to the customers of the e-dealers^TM. The Notification E-mail for an offering will be sent to customers of Wit Capital and customers of any e-dealers^TM participating in the particular offering. In addition, the e-dealers^TM participating in an offering through Wit Capital will create their own cul de sacs for each offering and make copies of the electronic prospectus for each offering available to their respective customers. Through these cul de sacs, customers of the e-dealers^TM will be able to transmit conditional offers to buy shares in an offering.
*8 Upon receipt of a conditional offer from one of its customers, an e-dealer^TM will electronically transmit that conditional offer to Wit Capital. The conditional offers transmitted will have been reviewed and screened by the applicable e-dealer^TM for compliance with the e-dealer's^TM suitability and other requirements. This procedure will enable Wit Capital to prioritize conditional offers among Wit Capital customers and customers of the e-dealers^TM based upon the time of transmission of the conditional offer. The transmission from the e-dealer^TM to Wit Capital will specify the number of shares that the customer is offering to buy as well as any limit price set by the customer. The e-dealer^TM, however, will not disclose to Wit Capital the identity of the e-dealer's^TM customer. In this system, Wit Capital will be responsible for allocation of shares among Wit Capital customers and the various e-dealers^TM; each e-dealer^TM, in turn, will be responsible for allocation of shares among its customers. Each e-dealer^TM will allocate shares among its customers in accordance with the first-come, first-served procedures of Wit Capital and with guidance from Wit Capital regarding the actual time that specific offers were booked.

3. Types of Offers

Customers may transmit two types of conditional offers. The first, which is the equivalent of a limit order, specifies a maximum price per share which the customer will agree to pay in the offering; the second, which is the equivalent of a market order, does not specify a maximum price. If the offering price in an offering exceeds the limit price established by the customer, that customer's conditional offer to buy will not be accepted without a subsequent affirmative reconfirmation from the customer reconfirming that the customer agrees to purchase shares at the higher price. In addition, Wit Capital will treat any conditional offer which does not specify a price as the equivalent of a limit order to purchase shares at the high end of the expected price range set forth in the preliminary prospectus for the particular offering at the time the conditional offer is made.
Thus, if the offering price in an offering exceeds the high end of the expected price range at the time the customer's conditional offer was placed, that customer's conditional offer to buy will not be accepted without subsequent affirmative action and reconfirmation from the customer that the customer agrees to purchase shares at the higher price. [FN15] These procedures, including timing, are described in greater detail in Section I.E.4. below.

FN15. See also the discussion of repricing in Sections I.E.4(g) and (h) below.

 

4. Process for Solicitation, Reconfirmation and Acceptance of Conditional Offers to Buy

(a) Summary of Proposal Regarding Pre-Effective Affirmative Reconfirmation of Conditional Offers to Buy

This section summarizes the procedures Wit Capital will follow in obtaining pre-effective affirmative reconfirmation of conditional offers which may be accepted post-effectiveness and pricing by a notice of acceptance. Approximately two business days prior to the expected effectiveness of an offering [FN16], Wit Capital will send an e-mail to each customer who has previously transmitted a conditional offer to buy shares in the offering requesting that the customer affirmatively reconfirm his or her previously transmitted conditional offer (the "Reconfirmation E-mail"). An affirmative reconfirmation from a customer will remain valid for a period of five business days from the end of the two business day period that commences with Wit Capital's transmission of the Reconfirmation E-mail. These procedures relating to the affirmative reconfirmation of conditional offers to buy on a pre-effective basis are discussed in more detail in this Section I.E.4.

FN16. For example, the two business day period would begin Tuesday morning for an offering expected to be declared effective on the following Thursday.

 

(b) Notification E-mails; the Pre-Conditional Offer Page; the Conditional Offer Page; and the Conditional Offer Verification Page

*9 As discussed in more detail above, communications with customers regarding a registered public offering will commence when Wit Capital sends out a Notification E-mail relating to the offering. The Notification E-mail will contain a hyperlink to the cul de sac created by Wit Capital for the particular offering. In addition, anyone viewing Wit Capital's general Web site will be able to hyperlink from the general Web site to the cul de sac for a particular offering. The cul de sac will include a copy of the preliminary prospectus for the offering that is then being circulated to prospective investors. [FN17] The cul de sac also will include the Conditional Offer page through which the customer will be able to enter a conditional offer to purchase shares in the offering. A customer will not be able to reach the Conditional Offer page on a cul de sac without first viewing the Pre-Conditional Offer page on the cul de sac. After placing a conditional offer, the customer will be brought to the Conditional Offer Verification page. The Conditional Offer Verification page will provide the customer with the details of his or her conditional offer. If the customer agrees that the information regarding his or her conditional offer is correct, the customer will then be required to click on a box entitled "Submit Conditional Offer" in order to make the transmission of his or her conditional offer effective. The Conditional Offer Verification page will contain statements to the customer substantially to the following effect:

FN17. As contemplated by Rule 15c2-8 under the Exchange Act, the electronic prospectus available in the cul de sac for an offering will be updated to contain the most current prospectus then being circulated to prospective investors.

 

(i) approximately two business days prior to the expected time of the registration statement being declared effective, the customer will receive a second e-mail notice from Wit Capital (a "Reconfirmation E-mail") requesting the customer to reconfirm his or her original conditional offer to buy shares in the offering;
(ii) in order to participate in the offering, the customer must affirmatively reconfirm his or her conditional offer in response to this Reconfirmation E-mail;
(iii) the customer may withdraw his or her conditional offer to buy at any time prior to acceptance of the customer's offer after effectiveness and pricing;
(iv) the customer's conditional offer cannot be accepted by Wit Capital until after effectiveness and pricing; and
(v) the customer's offer to buy can be accepted at any time after effectiveness and pricing, unless the customer has previously withdrawn his or her conditional offer to buy.

(c) Reconfirmation E-mails

Consistent with the foregoing notice, approximately two business days prior to the time at which Wit Capital anticipates the registration statement for an offering will be declared effective, Wit Capital will send the customer the Reconfirmation E-mail. [FN18] This two business day notice period will work as follows: if Wit Capital expects that an offering will be declared effective on Thursday morning or late Thursday afternoon, Wit Capital will send the Reconfirmation E-mail on Tuesday.

FN18. Although Wit Capital does not have control over the timing of the offering and so will not be able to predict accurately the time at which the registration statement for an offering will be declared effective and the transaction will be priced, Wit Capital will communicate regularly with the lead manager or issuer so that it can provide the Reconfirmation E-mail at least two business days before the registration statement is declared effective. In compliance with Rule 15c2-8, Wit Capital will not send a notice of acceptance to a customer unless the customer has placed a conditional offer at least 48 hours before the registration statement is declared effective.

 

*10 The Reconfirmation E-mail will contain statements substantially to the following effect:
(i) the registration statement for the offering may be declared effective shortly;
(ii) the customer should carefully consider the conditional offer that he or she has transmitted previously;
(iii) if the customer still wishes to participate in the offering, the customer must affirmatively reconfirm his or her previously transmitted conditional offer by responding to the Reconfirmation E-mail; [FN19]

FN19. Wit Capital will advise its customers in the Reconfirmation E-mail and by means of a "FAQ" that reconfirmation of an existing conditional offer does not guarantee specific customers that they will be allocated shares if the offering is declared effective and the transaction is priced.

 

(iv) if the customer sends a reconfirmation of his or her conditional offer, the customer will have authorized Wit Capital to accept the customer's conditional offer without further action by the customer if the registration statement is declared effective and the transaction is priced within five business days from the end of the two business day period that commences with the transmission of the Reconfirmation E-mail;
(v) if the customer does not respond to the Reconfirmation E-mail prior to the time Wit Capital commences the allocation process, the customer will not receive an allocation of shares;
(vi) the customer should, if he or she wishes to do so, review the current preliminary prospectus in light of all the information the customer has available about the offering, any other information the customer deems relevant and the current state of the market;
(vii) if the offering is declared effective, the customer will receive an e-mail announcing the effectiveness of the offering; and
(viii) the customer's reconfirmed conditional offer, if not previously withdrawn, may be accepted by Wit Capital at any time after effectiveness and pricing.
The customer must affirmatively reconfirm his or her conditional offer to buy in response to the Reconfirmation E-mail prior to the time Wit Capital ceases accepting reconfirmations [FN20] in order to be eligible to participate in the offering. A customer who does not reconfirm a conditional offer by the time indicated in the prior sentence will not be allocated shares.

FN20. These times will be no earlier than the time post effectiveness that customers will have to cancel a previously reconfirmed conditional offer.

 

The Reconfirmation E-mail will include a hyperlink to the current preliminary prospectus for the offering. A reconfirmation will be valid for a period of five business days after the end of the two business day period that commences upon Wit Capital's transmission of the Reconfirmation E-mail. If Wit Capital anticipates that the registration statement for the offering will not be declared effective within this 5 business day period, approximately two business days prior to the revised time that Wit Capital expects the offering to be declared effective, Wit Capital will send a second Reconfirmation E-mail requesting that the customer once again reconfirm his or her conditional offer to buy shares in the offering. This reconfirmation will then be effective for the following 5 business day period. This process will be repeated as necessary if the effectiveness of the registration statement continues to be delayed.
(d) Notification of Effectiveness and Pricing
*11 When the registration statement for an offering has been declared effective, Wit Capital will send its customers an e-mail notifying them that the offering has been declared effective (the "Effectiveness E-mail"). The Effectiveness E-mail will notify the customer that Wit Capital can accept his or her conditional offer by notice to the customer sent after pricing of the offering and that the customer has the right to withdraw his or her conditional offer at any time prior to the time at which Wit Capital sends the notice of acceptance. The Effectiveness E-mail will identify a specific time prior to which Wit Capital will not send a notice of acceptance (the "earliest acceptance time"). If pricing occurs after the close of regular trading on the applicable market, the earliest acceptance time will be 11:00 p.m., Eastern Standard Time. If pricing occurs in the morning or during regular trading hours on the applicable market, the earliest acceptance time will be at least one hour after the sending of the Effectiveness E-mail. In no event will a conditional offer be accepted prior to pricing.
After pricing of an offering, Wit Capital will determine the customers who will be allocated shares in that offering, based upon Wit Capital's first-come, first-served allocation system. After making such allocation, and after the earliest acceptance time has passed, Wit Capital will send either of two e-mail notices to its customers:
(i) if the customer has been allocated shares in the offering, a notice confirming allocation of shares to the customer, the number of shares allocated and the price (the "Acceptance E-mail"); and
(ii) if the customer has not been allocated shares in the offering, a notice to that effect.
The Acceptance E-mail will indicate that it is not the confirmation for purposes of Rule 10b-10 under the Exchange Act. The Rule 10b-10 confirmation will be sent to the customer by US Clearing, Wit Capital's clearing firm, as required by law.
In accordance with Section 5 of the Securities Act, US Clearing sends final prospectuses to Wit Capital's customers who have purchased shares in an offering. Wit Capital also makes available on the cul de sac a copy of the final prospectus in electronic format.

(e) Telephone Contact

Wit Capital does not intend to initiate telephone contact with any new or existing customer with respect to any offering. [FN21] If Wit Capital does have telephone contact with a customer with respect to any offering (other than ministerial assistance with technical matters in a telephone call initiated by the customer), Wit Capital will not accept a conditional offer from that customer unless it has received a post-effective affirmative reconfirmation of the customer's offer to buy. For example, if a customer were to call and request a paper copy of a preliminary prospectus and/or the final prospectus for an offering, Wit Capital would comply with that request for such assistance.

FN21. As part of its general business practice, Wit Capital makes representatives of Wit Capital available by telephone to answer customer questions. However, these telephone representatives, although properly registered, do not solicit or recommend retail customers to purchase shares in public offerings. Consistent with the foregoing, telephone representatives do not receive commissions or similar transaction-based compensation.

 

(f) Recirculations

*12 In the event that a recirculation of the preliminary prospectus for an offering is required, [FN22] Wit Capital will not accept a previously transmitted conditional offer from a customer for shares in that offering unless the customer reconfirms his or her previously transmitted conditional offer subsequent to the recirculation. This reconfirmation will be required from a customer even if the customer has previously reconfirmed his or her conditional offer in response to the Reconfirmation E-mail. [FN23] If the Reconfirmation E-mails have not yet been transmitted for an offering, a reconfirmation in response to the Recirculation E-mail (described in the following paragraph) can obviate the need for Wit Capital to send a Reconfirmation E-mail, but only if the offering is declared effective within five business days after transmission by Wit Capital of the Recirculation E-mail.

FN22. An issuer in an offering, with the advice of the managing underwriter or underwriters in the offering, will recirculate the prospectus if it determines that the recirculation is necessary to ensure that the prospectus does not contain an untrue statement of material fact. See, e.g., "Disclosure of Security Ratings in Registration Statements," Release No. 33-6336, 34-18012, IC-11892 (August 6, 1981).

FN23. The term "Reconfirmation E-mails" refers to the Reconfirmation E-mails described in Section I.E.4.(c) above.

 

In the event of a recirculation, Wit Capital will send an e-mail to its customers (the "Recirculation E-mail") notifying them that the preliminary prospectus for the offering has been amended. The Recirculation E-mail will further provide the following information:
(i) material changes have been made to the prospectus;
(ii) the amended prospectus is available at the cul de sac for that offering (via hyperlink);
(iii) in order to participate in the offering, the customer must reconfirm his or her previously transmitted offer in response to the Recirculation E-mail; and
(iv) the customer should review the amended preliminary prospectus carefully to determine whether or not he or she wishes to reconfirm his or her previously transmitted conditional offer.
The Recirculation E-mail for an offering will contain a hyperlink to the cul de sac for the offering. The cul de sac will include a copy of the amended preliminary prospectus for the offering that is then being circulated to investors. As in the case of other reconfirmations, a customer who reconfirms his or her offer in response to the Recirculation E-mail in a timely manner will preserve his or her original priority in Wit Capital's first-come, first-served allocation system based upon the time that the customer transmitted his or her original conditional offer to buy.

(g) Changes in Price Prior to Effectiveness

In the event that the expected price range for an offering is changed prior to effectiveness, Wit Capital will not accept a previously transmitted conditional offer from a customer for shares in that offering unless the customer reconfirms his or her previously transmitted conditional offer subsequent to the change in the price range. This reconfirmation will be required from a customer even if the customer has previously reconfirmed his or her conditional offer in response to the Reconfirmation E-mail. If the Reconfirmation E-mails have not yet been transmitted for an offering, a reconfirmation in response to the Pre-Effective Change in Price Range E-mail (described in the following paragraph) can obviate the need for Wit Capital to send a Reconfirmation E-mail, but only if the offering is declared effective within five business days after transmission by Wit Capital of the Pre-Effective Change in Price Range E-mail.
*13 To that effect, in the event of a change in price range for an offering prior to effectiveness, Wit Capital will send an e-mail to its customers (the "Pre-Effective Change in Price Range E-mail") notifying them that the expected price range for the offering has been amended. [FN24] The Pre-Effective Change in Price Range E-mail will further provide as follows:

FN24. On a case by case basis, the issuer and the lead manager for an offering will determine whether a pre-effective amendment to the registration statement is required.

 

(i) in order to participate in the offering, the customer must reconfirm his or her previously transmitted conditional offer to buy in response to the Pre-Effective Change in Price Range E-mail; and
(ii) the customer should review the current preliminary prospectus carefully to determine whether or not he or she wishes to reconfirm his or her previously transmitted conditional offer.
The Pre-Effective Change in Price Range E-mail for an offering will contain a hyperlink to the cul de sac for the offering. The cul de sac will include a copy of the preliminary prospectus for the offering. As in the case of other reconfirmations, a customer who reconfirms his or her previously transmitted conditional offer to buy in response to the Pre-Effective Change in Price Range E-mail in a timely manner will preserve his or her original priority in Wit Capital's first-come, first-served allocation system based upon the time that the customer transmitted his or her original conditional offer to buy.

(h) Pricing Outside the Range

When an offering prices outside the expected price range, Wit Capital will not accept conditional offers from customers for that offering without affirmative reconfirmation from customers after notification of the offering price. To that effect, when an offering prices outside the expected price range, Wit Capital will send an e-mail to its customers notifying them of the offering price and of the fact that the offering has priced outside the expected price range (the "Pricing Outside E-mail"). The Pricing Outside E-mail will further provide as follows:
(i) in order to participate in the offering, the customer must reconfirm his or her previously transmitted conditional offer to buy in response to the Pricing Outside E-mail; and
(ii) the customer should review the current preliminary prospectus carefully to determine whether or not he or she wishes to reconfirm his or her previously transmitted conditional offer.
In this situation, Wit Capital customers who fail to respond in time may lose their priority in Wit Capital's first-come, first-served allocation process.

(i) E-dealers

The e-dealers^TM shall follow procedures consistent with those described in this no-action request, including the procedures described herein relating to the solicitation, reconfirmation and acceptance of conditional offers to buy shares in an offering.

5. Orders for the Secondary Market

*14 Wit Capital will not convert conditional offers to buy shares in an offering, where the customer is not allocated shares in the offering, into either market or limit orders for the secondary market. Similarly, Wit Capital does not and will not permit any customer to place orders for the secondary market for shares of an issuer making an initial public offering until the registration statement for the offering has been declared effective. Upon effectiveness, if the issuer's stock is trading at a premium to the initial public offering price, Wit Capital will accept limit orders, but not market orders, until the market for the issuer's stock opens on the following business day.

F. Other Matters

The following points are also relevant to this letter:
(i) post-effective acceptance of conditional offers is not automatic; rather, acceptance by Wit Capital of a customer's conditional offer to buy becomes effective upon Wit Capital transmitting a notice of acceptance to the customer;
(ii) the procedures described in this letter will be explained in the Rules and Procedures and FAQ Web pages on Wit Capital's general Web site and the cul de sacs;
(iii) Wit Capital will not announce to customers or indicate on its Web site prior to effectiveness of an offering that it has ceased to accept conditional offers for shares in the offering; however, Wit Capital's Rules and Procedures and FAQ Web pages may discuss over-subscriptions generally without reference to any specific offering; and
(iv) Wit Capital does not and will not post notice of a public offering on its Web site or send a Notification E-mail for an offering until the "red herring" preliminary prospectus (the preliminary prospectus that is generally distributed to or made available to customers of the underwriting syndicate) is available. Wit Capital will at that time make a copy of the red herring conforming to the requirements of Section 502(a) of Regulation S-K available in electronic format on a cul de sac established by Wit Capital for the offering.

G. Minimum Deposit Requirement

Customers of Wit Capital may purchase and sell securities through Wit Capital's Web site. These include securities issued in public offerings as well as securities purchased and sold in the secondary market. In order to purchase and sell securities through Wit Capital, a customer must open an account with US Clearing, Wit Capital's clearing broker. US Clearing clears transactions for Wit Capital customers on a fully-disclosed basis.
In order to transmit an order for the purchase of a security, a customer must have on deposit in his or her account at US Clearing a minimum amount of cash or equity specified by Wit Capital. At present, the minimum required amount is $2,000 for a cash account or a margin account. This minimum amount is uniform for all transactions by a customer and applies regardless of whether the customer is purchasing shares in a public offering or in the secondary market. In addition, the minimum amount is determined without reference to the price or number of shares being offered in an offering, or the amount of shares sought in a particular conditional offer. [FN25] The minimum deposit requirement is intended to protect Wit Capital against the credit risk of a customer failing to make payment for a security by settlement date. To the extent that the purchase price of a security exceeds the cash balance available in his or her account, the customer must make payment of such additional amount on or before settlement date for the transaction. Amounts on deposit in the customer's account are within the customer's full control and are subject to withdrawal by the customer without restriction at any time prior to execution of a transaction. Based upon the foregoing, we believe that this activity is not of the type that has been of concern to the Commission, as expressed in Securities Act Release 5071, June 29, 1970.

FN25. Securities in a public offering cannot be margined during the 30 day period described in Section 11(d)(1) of the Exchange Act. If purchased in a margin account the securities must be fully paid and do not count in computing the equity in the margin account or SMA balances until the 30-day period described in Section 11(d)(1) of the Exchange Act has passed.

 

II. Analysis

A. General

*15 We are of the opinion that the procedures described in this letter comply with the requirements and policies of the Securities Act and the Exchange Act and the rules and regulations of the Commission thereunder. We address two specific aspects of the procedures described above: (i) Wit Capital's acceptance of conditional offers to buy; and (ii) the characterization of the various e-mails described in this letter and the content of the cul de sacs for purposes of Sections 2(a)(10) and 5(b)(1) of the Securities Act.

B. Acceptance of Conditional Offers to Buy

We believe that an investor's conditional offer to buy shares in a public offering may be accepted by an issuer or underwriter by transmitting a notice of acceptance of the customer's offer after effectiveness and pricing. Our position is based upon the fundamental distinction between an indication of interest and an offer to buy. This distinction is supported by the 1954 amendments to the Securities Act, the legislative history to the 1954 amendments, the wording of Rule 134(d), the changes made to Rule 134(d) from the proposing release to the adopting release and the interpretations of various commentators (including Professor Louis Loss).
The solicitation of an indication of interest by an issuer or an underwriter is part of the process through which the issuer or underwriter makes an offer to sell to the investor. The investor's submission of an indication of interest involves no obligation or commitment of any kind on the investor. Rather, the issuer or underwriter solicits indications of interest from investors as a way to better focus its efforts in marketing offers to sell the security. Everyone agrees that the investor must affirmatively "firm-up" his or her prior indication of interest, after the registration statement has been declared effective, into a full-blown formal acceptance of the issuer's and underwriter's offer to sell.
This must be contrasted with the situation where the issuer and the underwriter structure the offering so as to solicit from the investor a conditional offer to buy. A conditional offer to buy is a contractual offer by the investor subject, of course, to the condition that the offer cannot be accepted until after the registration statement has become effective. In accordance with basic contract law, once the condition to the offer has been satisfied (and provided that the offer has not been withdrawn by the investor), the offer may be accepted by the issuer and underwriter. As discussed above, Wit Capital will not send a notice of acceptance of a conditional offer to buy shares in an offering until after effectiveness and pricing. We believe that the acceptance of the customer's conditional offer to buy through the sending of this notice of acceptance complies with the requirements of Section 5 of the Securities Act.
In support of our view that investors' conditional offers to buy can be accepted upon the sending of a notice of acceptance after effectiveness without affirmative confirmation from the customer after the effective time, we note the following points:
*16 * in 1954, Section 5(a) of the Securities Act was expressly amended to permit offers to sell and solicitations of offers to buy during the waiting period;
* the legislative history of the 1954 amendments to the Securities Act contemplates the solicitation by dealers from customers of conditional offers to buy; [FN26]

FN26. Legislative History to the 1954 Amendments to the Securities Act (HR No. 1542, 2 U.S. Code Cong & Administrative News, pp. 2973-3004).

 

* Rule 134(d) evidences a clear distinction between the solicitation of indications of interest and the solicitation of conditional offers to buy consistent with our analysis: indications of interest involve "no obligation or commitment of any kind" from the investor; in contrast, an offer to buy is revocable by the investor "at any time prior to notice of its acceptance given after the effective date"; [FN27]

FN27. In our view, this indicates that once an offer has been accepted by the issuer or underwriter after the effective date and the offering has been priced, the offer can no longer be revoked by the investor. In other words, once the registration statement has been declared effective and the offering has been priced, notice of acceptance by the issuer or underwriter creates a binding agreement and affirmative confirmation from the customer is not required.

 

* Rule 134(d) as originally proposed provided for the solicitation of indications of interest but not of conditional offers to buy; Rule 134(d) as adopted provided for the solicitation of indications of interest as well as conditional offers to buy; [FN28] and

FN28. Securities Act Release No. 3525 (March 10, 1955); Securities Act Release No. 3568 (August 29, 1955).

 

* the late Professor Loss, in his definitive treatise on the securities laws, has set forth as distinct techniques the solicitation of conditional offers to buy, "which the seller can then accept after the effective date," and the solicitation of indications of interest, which is part of the process through which an issuer or underwriter makes an offer to sell to the investor. [FN29]

FN29. Louis Loss, Securities Regulation (2d edition 1961), pp. 223-24, and update p. 2320; Louis Loss and Joel Seligman, Securities Regulation (1989), Volume I, pp. 460-462. See also, "Over-The-Counter Securities Group, Inc.," no- action letter dated December 19, 1989, at footnote 13.

 

C. Free Writing Issues

1. Illegal Free Writings

Section 5(b)(1) of the Securities Act makes it unlawful to transmit any "prospectus" in connection with any offering not exempt from Section 5 of the Securities Act unless the prospectus meets the requirements of Section 10 of the Securities Act. Prospectuses transmitted during the waiting period for an offering or after effectiveness but prior to delivery of a final prospectus that do not meet the requirements of Section 10 are sometimes referred to as "free writings."
*17 The term "prospectus" is defined in Section 2(10) of the Securities Act as "any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security," subject to certain provisos. One proviso states that
a communication sent or given after the effective date of the registration statement ... shall not be deemed a prospectus if it is proved that prior to or at the same time with such communication a written prospectus meeting the requirements of subsection (a) of Section 10 at the time of such communication was sent or given to the person to whom the communication was made.
Another proviso states that
a notice, circular, advertisement, letter, or communication in respect of a security shall not be deemed to be a prospectus if it states from whom a written prospectus meeting the requirements of Section 10 may be obtained and, in addition, does no more than identify the security, state the price thereof, state by whom orders will be executed, and contain such other information as the Commission, by rules or regulations deemed necessary or appropriate in the public interest and for the protection of investors, and subject to such terms and conditions as may be prescribed therein, may permit.
Pursuant to the latter proviso, the Commission has adopted Rule 134. Rule 134 provides that a communication published or transmitted after a registration statement has been filed shall not be deemed a prospectus if it contains only the statements required or permitted under Rule 134. The e-mails and the cul de sacs described in this letter (collectively, the "Communications") should not constitute illegal prospectuses because each of the items of information in such Communications fall within one or more of the following categories:
i. the Communication is the prospectus itself in compliance with Section 10 of the Securities Act;
ii. the content of the Communication is permitted under Rule 134; or
iii. the content of the Communication is neither an "offer to sell or solicitation of an offer to buy," because it relates to the operating procedures of the broker-dealer, nor a confirmation of sale.
The Federal courts and the Commission generally have interpreted illegal "free writing" as involving written communications regarding an issuer or a particular offering that is transmitted with the intention of stimulating interest in the issuer or the offering. [FN30] Rule 134 notices, by definition, do not constitute illegal "free writings."

FN30. See, e.g.: Gustafson v. Alloyd Company, Incorporated, 523 U.S. 561 (1995); Chris-Craft Industries, Inc. v. Bangor Punta Corporation, 426 F.2d 569 (2d Cir. 1970); Securities and Exchange Commission v. Arvida Corporation, 169 F.Supp. 211 (S.D.N.Y. 1958); Securities and Exchange Commission v. Commercial Investment and Development Corporation of Florida, 373 F.Supp. 1153 (S.D.Fl. 1974); Securities and Exchange Commission v. Thomas D. Kienlen Corporation and Thomas D. Kienlen, 755 F.Supp. 936 (D. Or. 1991); "Publication of Information Prior to or After the Filing and Effective Date of a Registration Statement under the Securities Act of 1933," Securities Act Release No. 5009 (October 7, 1969); and "Publication of Information Prior to or After the Effective Date of a Registration Statement," Securities Act Release No. 3844 (October 8, 1957).

 

*18 For purposes of our analysis, we analyze separately each of the following Communications: the Notification E-mails and the Gateway page to the cul de sac, which we conclude are Rule 134 notices; Communications relating to Wit Capital's account opening and other procedures, which we believe do not "offer to sell" securities; and Communications relating to the solicitation and transmission of conditional offers to buy, which we believe are permitted under Rule 134(d). Finally, we discuss the Acceptance E-mail in the context of whether it constitutes a confirmation of sale.

2. Rule 134 Notices

Exhibit A contains the text of the Notification E-mails that Wit Capital proposes to send to its members notifying them of public offerings. The information and statements contained in the Notification E-Mails are limited to the following information and statements as permitted under Rule 134: the name of the issuer ((a)(1)) [FN31]; the name and address of the sender of the communication and the fact that it is participating in the distribution of the security ((a)(6)); the names of the managing underwriters ((a)(7)); the name and address of a person or person from whom a written prospectus meeting the requirements of Section 10 of the Securities Act may be obtained ((b)(3)); a brief indication of the general type of business of the issuer ((a)(3)); the full title of the security and the amount being offered ((a)(2)); solicitation from the recipient of an offer to buy the security or request for the recipient to indicate whether he might be interested in the security, if the disclosure required by Rule 134(d) is included within the Rule 134 notice ((d)); and the disclosure contained in Rule 134(b)(1) to the effect that the securities may not be sold until the registration statement for the offering has been declared effective ((b)(1)). Exhibit A contains the disclosure required by Rule 134(d). The only statement that appears in Exhibit A that is not authorized under Rule 134 is the statement that "Wit Capital is a Member NASD/SIPC." We do not believe that this statement would constitute an "offer to sell" within the meaning of Section 2(3). Rather, such statement is incidental to Wit Capital's conduct of its business as a registered broker-dealer and NASD member.

FN31. The subsections of Rule 134 that authorize the specified information are set forth in parentheses.

 

Exhibit B, the template for the Gateway page to the cul de sacs that Wit Capital proposes to use similarly contains only the information and statements permitted under Rule 134: the name of the issuer ((a)(1)); the full title of the security and the amount being offered ((a)(2)); the probable price range ((a)(4)); the name(s) of the managing underwriter(s) ((a)(7)); the name and address of a person or persons from whom a written prospectus meeting the requirements of Section 10 of the Securities Act may be obtained ((b)(3)); a brief indication of the general type of business of the issuer ((a)(3)); and the Rule 134(b)(1) and Rule 134(d) disclosures described above.

3. Account Opening and Other Procedures of Wit Capital

*19 The next issue to consider is whether the inclusion of the account opening and other procedures of Wit Capital on the cul de sacs, as well as other Communications on the cul de sacs that relate to Wit Capital's relationship with its members or customers, constitutes illegal free writing. We include within this category of Communications the following Web pages: the Registration page (Exhibit C); the Open Account pages (Exhibit H); Wit Capital's Rules and Procedures (Exhibit I); FAQs (Exhibit J); Contact Us (Exhibit K); and Mailing List (Exhibit L). We also include within this category the e-mail notices described in Sections I.F.(iv)(c), (d), (f), (g) and (h) above.
These Communications do not relate or refer to any particular offering. Rather, as discussed above, these communications relate to Wit Capital's general operating procedures and are provided for one or more of the following independent purposes: (i) to assist customers in transacting business with Wit Capital through Wit Capital's Internet Web site; or (ii) to comply with various legal and regulatory requirements applicable to Wit Capital as a registered broker-dealer and an NASD member, including suitability requirements and the requirement under Section 2110 of the Conduct Rules of the NASD that, "[a] member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade." We believe that Section 2110 encompasses a requirement for a broker-dealer to notify customers of the rules and procedures that the customer is subject to when the customer transacts business with the broker-dealer. The Rules and Procedures and FAQs pages promote compliance with this requirement. We believe that the e-mail notices described in Sections I.F. (iv)(c), (d), (f), (g) and (h) above similarly relate to Wit Capital's operating procedures and, thus, are not illegal free writings as contemplated by Section 5. Alternatively, we believe that such e-mail notices are consistent with Rule 134(d).
We believe that it is useful to consider the activities of a traditional broker-dealer in this regard. If a traditional broker-dealer mails to a customer a package to open an account with the broker-dealer, does that mailing constitute an offer to sell in violation of Section 2(3)? If that package includes a copy of a prospectus, does the account opening documentation constitute an illegal prospectus in violation of Section 5(b)(1)? What if the package includes an account agreement or a brochure discussing participation in public offerings generally? What if a customer walks into a brokerage firm's office and the brokerage firm provides the customer with a copy of a preliminary prospectus for an offering and, at the same time, an account opening package or a brochure relating to public offerings generally?
We believe that in each of these cases the enclosed materials (or the materials provided with the prospectus) do not constitute illegal prospectuses. That is because the enclosed materials or the materials provided (other than the prospectus) relate to the broker-dealer's account opening or similar procedures. The materials do not relate to any specific offering or communicate information about any particular issuer, the veracity or reliability of which could be called into question, but instead serve an independent business purpose. Indeed, the regulatory scheme under which Wit Capital operates, including Commission and NASD sales practice rules, would seem to be more than adequate to address investor protection concerns regarding the accuracy of a broker-dealer's account opening and order handling materials. We believe that the same result that applies to a broker-dealer using the U.S. mails should apply for Wit Capital in its use of the Internet both during the waiting period and after effectiveness.
*20 We can also compare the Communications discussed in this section to communications used in connection with traditional offerings where shares in the offering are reserved for employees, customers or subscribers of the issuer (commonly referred to as "friends and family" or "directed" offerings). The underwriter selected to manage the friends and family portion of an offering generally will send notices to the select group. These notices will contain information about the issuer and the particular offering as permitted under Rule 134. However, since many of the persons being solicited will not have accounts with the underwriter, the letter will include instructions regarding the underwriter's operating procedures and how the customer can participate in the offering through the underwriter. In our view, these communications are not illegal prospectuses because such communications (other than the portions of the communications permitted under Rule 134) relate to the broker-dealer's operating procedures rather than the issuer or the particular offering.
We also note that Rule 134(d), which authorizes a broker-dealer to enclose with its solicitation an "enclosed or attached coupon or card" on which the recipient can indicate whether he might be interested in the security, nowhere specifies the information that may be contained on such card. We believe that one likely reason for this omission is that the Commission considered the content of the card itself to relate to the broker-dealer's operating procedures and, thus, it was not necessary for the Commission to set forth the types of statements that would be permitted on that coupon or card.
Finally, we believe that the materials discussed in this section should be analyzed in light of the primary purpose of Section 5(b)(1), which is to ensure that investors do not rely upon incomplete or inaccurate information regarding the issuer or the particular offering, but instead make their investment decisions based upon the information contained in the prospectus. We believe that the communications on these Web pages, because they relate to the operating procedures of Wit Capital, and do not provide information regarding the issuer or the particular offering, should not be characterized as illegal prospectuses.

4. Communications Relating to Conditional Offers and Viewing of the Prospectus

This section discusses the Prospectus Links page (Exhibit D), the Prospectus page (Exhibit E), the Pre-Conditional Offer page (Exhibit F), the Conditional Offer page (Exhibit G) and the Conditional Offer Verification page (Exhibit G1). As described in the facts section above, after a member has completed the Registration page, the member is brought to the Prospectus Links page. Through the Prospectus Links page, the member can elect to view the electronic prospectus by selecting the desired format; alternatively, the member can elect to transmit a conditional offer.
The information that requests the cul de sac viewer to select a format for viewing the electronic prospectus should not be deemed to be an illegal prospectus. Analogizing to the traditional broker-dealer, no one would suggest that words on the outside of an envelope instructing the customer on how to open the envelope would constitute an illegal prospectus.
*21 We also believe that the Web pages on the cul de sac which enable the customer to transmit a conditional offer should not be deemed illegal prospectuses. The information on these pages is contemplated by Rule 134(d) which permits communications accompanied by a prospectus "that solicit from the recipient of the communication an offer to buy the security or request the recipient to indicate, upon an enclosed or attached coupon or card, or in some other manner, whether he might be interested in the security." We believe that the phrase "or in some other manner" would permit this type of Communication. [FN32]

FN32. See IPOnet no-action letter dated July 26, 1996.

 

These pages also contain an acknowledgment from the customer that the customer consents to electronic delivery of documents and warnings to the customer to read the prospectus. We believe that the acknowledgment relates to the relationship between Wit Capital and its customers, as discussed above. The warning to the customer to read the prospectus promotes one of the purposes of Section 5(b)(1) which is to encourage investors to read the prospectus and learn more before they invest.

5. Communications on or Hyperlinked from Wit Capital's General Web Site

Wit Capital has established a cul de sac for each offering in order to separate communications on Wit Capital's general Web site (and communications on third-party Web sites that can be reached by hyperlink from Wit Capital's general Web site) from information on the cul de sac. Viewers can hyperlink from Wit Capital's general Web site to the cul de sac for a particular offering. However, viewers cannot hyperlink from within a cul de sac to Wit Capital's general Web site.
Persons using the Internet have the ability, through the use of browser functionality, to navigate from any unrestricted Web site on the Internet to any other unrestricted Web site on the Internet. Therefore, a visitor has the ability, by using browser functionality, to navigate from the cul de sac for an offering to Wit Capital's general Web site. However, Wit Capital will not provide any hyperlinks or other navigational aids that will assist a visitor in hyperlinking from the cu de sac to Wit Capital's general Web site or any third party Web site.
The cul de sacs and the concept underlying them are derived from the differentiation between communications regarding a security and its issuer on the one hand and communications that relate to being a customer of a broker-dealer on the other. These latter communications relate to matters such as the mechanics of ordering a securities transaction, obtaining information about one's account, or learning about the mechanical aspects of transactions. [FN33] As refined, the cul de sac separates these two types of communications more finely. Communications related to the mechanical aspects of participating in a public offering are available within the cul de sac. All other communications related to the aspect of being a customer are not available within the Web site. This further limits the potential for confusion about what information constitutes a part of the sales material that is intended to persuade someone to participate in an offering and therefore should be deemed a prospectus and that which is not and should be permissible free writing.

FN33. Other examples of this type of communication would include descriptions of the nature of markets, types of securities generally (e.g., common characteristics of bonds), and the differences among types of orders (e.g., characteristics of market orders, limit orders or GTC orders). On Wit Capital's Web site, these include Rules and Procedures and FAQs.

 

6. Acceptance E-mail

*22 Pursuant to Section 2(10) of the Securities Act, a prospectus includes any communication that "confirms" the sale of any security. In our view, the Acceptance E-mail should not constitute a "confirmation" for purposes of Section 2(10), provided that a confirmation satisfying the requirements of Rule 10b-10 under the Exchange Act is sent to purchasers on a timely basis in accordance with the requirements of that rule. In our view, the Acceptance E-mail is a substitute for the telephone call that the traditional broker-dealer makes to his or her customer notifying the customer that he or she has received shares in an offering. This telephone call, like the Acceptance E-mail, precedes the official Rule 10b-10 confirmation which is generally sent by regular mail.

III. Conclusion

In view of the foregoing, we are of the opinion that the procedures described in this letter comply with the requirements and policies of Section 5 of the Securities Act and the rules and regulations of the Commission thereunder, and we respectfully request that the Division advise us that it would not recommend that the Commission commence enforcement action against Wit Capital pursuant to the Securities Act if Wit Capital, other underwriting syndicate members, selected dealers, selling group members and other registered dealers were to follow the procedures described in this letter in connection with their participation in registered public offerings.
In the event the Staff does not concur with any of these views, Wit Capital respectfully requests an opportunity to discuss the matter prior to any final decisions thereon. If you have any questions or comments, or if you require any further information, please contact Robert C. Mendelson of Wit Capital at (212) 253-5274 or any of the following attorneys at Morgan, Lewis & Bockius LLP: Stephen P. Farrell at (212) 309-6050; George G. Yearsich at (202) 467-7255; Jonathan Kallman at (212) 309-6961; or Howard L. Meyerson at (212) 309-6030.
In accordance with Release No. 33-6269, seven additional copies of this letter are enclosed. This letter also is being submitted electronically in accordance with Release No. 33-4727.

Very truly yours, 
Stephen P. Farrell
Robert C. Mendelson
Senior Vice President and Co-General Counsel
MORGAN, LEWIS & BOCKIUS LLP
101 Park Avenue
New York, NY 10178
(212) 309-6000
WIT CAPITAL CORPORATION
826 Broadway, 6th Floor
New York, NY 10003
(212) 253-4400

 

1933 Act / s 5

July 14, 1999

Publicly Available July 14, 1999

Re: Wit Capital Corporation ("Wit Capital")
Incoming letter dated July 14, 1999
Based on the facts presented, but without agreeing with your analysis, the Division will not recommend enforcement action to the Commission if Wit Capital, in reliance on your opinion of counsel that the practices and procedures described in your letter comply with sections 5(a) and 5(b)(1) of the Securities Act of 1933, participates in registered initial public offerings of securities ("IPOs") in the manner described in your letter. Our no-action position is limited to registered IPOs underwritten on a "firm-commitment" basis.
*23 We understand that Wit Capital would not affirmatively seek a customer's reconfirmation of his or her pre-effective "conditional offer to buy" (as defined in your letter) following post-effective pricing of the offering pursuant to rule 430A, as is the current practice with respect to indications of interest. We note your opinion that the series of communications between Wit Capital and such persons will not be tantamount to a pre-effective sale contrary to Securities Act section 5(a). In this connection, we further note your representations that the scheduling notices, reconfirmation e-mails, pricing and effectiveness notices will precede Wit Capital's post-pricing transmission of any notice of acceptance of any customer's conditional offer to buy. We further note that any person who has made a conditional offer to buy prior to the effective date will be given a final opportunity to withdraw his or her offer at any time before it is accepted by Wit Capital after effectiveness and pricing, and that any such person who has failed affirmatively to reconfirm his or her offer on a pre-effective or post-effective basis will not be allocated shares in the IPO.
With respect to e-mails from Wit Capital to its customers and additional information posted within the segregated areas of Wit Capital's website that includes the preliminary prospectus for an offering, the Division has noted your opinion that these communications either are general procedural notifications regarding Wit Capital's business practices and the conduct of the offering, or notices conforming to Securities Act rule 134. The Division also has noted your opinion that the e-mail notice of acceptance is "an acceptable substitute" for notification of the customer by telephone that he or she has received an allocation in the offering, and that this notice will be followed by a confirmation satisfying the requirements of rule 10b-10 under the Securities Exchange Act of 1934. We expect the Commission to address these issues, as discussed in the next paragraph.
You have not asked, and we do not address, Wit Capital's responsibilities under the federal securities laws to cleanse (or otherwise modify) its general website of any information that could be deemed illegally to condition the market for a particular IPO security. These and other issues arising from the use of electronic communications media in the context of registered and exempt securities offerings (including, but not limited to, those identified in the preceding paragraph) are under consideration, or will be considered, by the Commission. In particular, the question of whether Internet-based or other electronic communications should be treated as written or oral in character has been raised by the Commission in Securities Act Release No. 7606A (Nov. 13, 1998). Accordingly, nothing in our response should be viewed as taking a substantive position on any of these issues.
The Division of Market Regulation has asked us to remind you that, as a registered broker-dealer, Wit Capital is required to comply with the Exchange Act, the rules thereunder, and the rules of the self-regulatory organizations of which it is a member. The Division of Market Regulation is not addressing whether the procedures outlined in your letter satisfy any of these requirements.
*24 This position is based on the representations made in your letter, as well as your opinion of counsel. Different facts or conditions therefore might require a different result. Moreover, this letter expresses the Division's position on enforcement action only, and does not express any legal conclusions on the questions presented or any other matter discussed in your letter. Finally, because regulatory responses to legal issues raised by rapid developments in information technology necessarily must evolve, you should be aware that this no-action position may be re-evaluated by the Division and is subject to change by the Commission.

Sincerely, 
  
Michael Hyatte
Special Counsel

Securities and Exchange Commission (S.E.C.)
1999 WL 498545 (S.E.C. No - Action Letter)
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