Drafting Disclosure Tailored for the Web

The first goal is most easily accomplished with a hierarchical line across the top of the page -- or at a minimum, with a caption on the top of the page that identifies its location. Each page thus needs its own identification label. The second goal also is not too difficult since browsers already have "back" (i.e., return to prior page visited) and "history" (i.e., list of most recently visited pages) functionality. Using the standard purple color for used links also satisfies this goal.

The most important goal of navigation is informing investors where they can go. Again, a hierarchical line serves this purpose, as does useful and descriptive links strategically scattered throughout the disclosure. A table of contents probably does not need to be made continuously accessible, even from a pull-down menu. In contrast to using links, pull-down menus are unable to show an investor that they have already been there -- thereby not fulfilling the second goal.

An invaluable tool to help investors find information is a scoped search function. This tool allows investors to search for terms just within the disclosure document.16 This tool should always be highly visible, preferably at the top of each page. Boolean search should not be used since studies show that most investors are not sophisticated searchers. For example, if an investor wanted information relating to either earnings or sales, they would input "earnings and sales," instead of "earnings or sales."17 The first search would unintentionally return fewer results compared to the second.

The Power of Links

The power of hyperlinks is often misunderstood and underestimated. Links are not meant to split a long linear flow of disclosure into multiple pages. Instead, companies should use links to:

Structural navigation links can be used to split information into logical topical chunks. Then investors can choose the topics they wish to focus on, yet still be aware of what else is available. With long linear disclosure, investors are more apt to quickly give up and never realize what other information choices were available -- and they tend to find it difficult to search for particular information. In addition, it is nearly impossible to read this disclosure online; investors are forced to print out entire disclosure documents to find information relevant for them.

Investors tend to use links as guideposts to what the surrounding content is about -- and as a way to rest their eyes when scanning. As a result, the decision about what particular words to use in a hypertext link is critical. To serve as proper guideposts, links should not exceed two to four words in length. Only words that convey important information should be made into links; additional explanatory language can be included with these words so long as they are not part of the link itself. These explanations should be brief -- with a maximum of 60 characters -- and serve to allow investors to make an informed decision about whether to follow a particular path.18

Even though blue is not the easiest color to read online, it has become the universally accepted convention to indicate that particular text is a link. Similarly, purple is used to indicate that an investor has already visited a particular link. Since deviating from this norm only serves to confuse investors and cost them time, the established conventions should be followed. Surprisingly, more than a few companies experiment and do not follow these conventions.

Although the usefulness of linking to third-party content is evident, it is not recommended in SEC filings due to the liability that attaches. The SEC has made it clear that any third-party content linked from a company's disclosure document is deemed part of that document for liability, delivery, and filing purposes.19 Although it may be tempting to link to innocuous content from prospectuses or periodic reports for background purposes -- such as a site devoted to providing raw data on a company's industry -- a company should refrain because the content is outside of its control and yet the company would be responsible for it if it linked to it.

Even more challenging is determining how to file content that may change on a daily basis and convincing a Web site owner to provide a consent, if required.20 Consents are required whenever content is linked because the company believes that such content is valuable as the report or opinion of an expert or counsel -- even if only a quote or summary of a report or opinion is linked. Of course, most third parties are not willing to provide a consent since they then have Section 11 expert liability for their content even though they are not raising capital or making a required disclosure for themselves.

Convert Cover Pages to "Homepages"

Based on usability studies, investors likely scan the first page they see to find matters of interest.21 If they do not find anything of value, they resort to understanding the document's navigation system to locate interesting content. Under the current SEC regulations, the first page of online disclosure normally consists of either the facing page of a registration statement or a cover page of periodic report, prospectus, or proxy statement.22 Neither of these is overwhelming in their usefulness, particularly facing pages.

Ideally, the first page of a disclosure document would be its "homepage." From this page, investors could make informed choices about what information they want to review from a series of descriptive links -- or from a highly visible search tool. Since a page normally loads from top to bottom, the most useful information should be placed higher on the homepage. To reduce clutter on homepages, the techniques of aggregation, summarization, filtering, and truncation should be used.23 To make this "homepage" more relevant, it could contain even more useful information than normally is available on the first page of a disclosure document.24

The Need for Speed

When deciding how to draft online content, companies should ensure that the content of each page "loads" quickly.25 Online investors are extremely impatient. At this time, it has been proven that we feel like we are moving freely through information if pages load within one second. In contrast, load delays of more than 10 seconds are likely to lose an investor's interest.26

Even though many investors -- particularly institutional investors -- have broad bandwidth connections of T1 or T3 lines, there are numerous investors still connecting through a dial-up modem. To accommodate these investors by keeping download times under 10 seconds, a page should contain no more than 34 kilobytes of data. This rules out using most types of multimedia that can take quite a long time to load, even with broad bandwidth connections.

Brief Is Bliss

You probably have noticed that you do not enjoy reading documents online because it tends to make your eyes tired. Studies now show that we read 25 percent slower online than reading hard copy.27 In addition, scrolling takes an additional effort from investors. As a result, online text should be kept shorter than it would be presented in print.

The drafter's challenge is to reduce text by at least 25 percent -- and probably more -- so that the reading experience is comparable to reading from paper. Reducing text while not omitting information that renders the information misleading is critical. One possible solution is to make ample use of links and to approach drafting with a design strategy that involves layering of -- or "drilling down" to -- information. This technique can allow a company to have identical online and offline disclosure documents -- just with differing formatting.

By relegating information that is more detailed or background in nature to "secondary" pages, information that is valuable to a minority of investors is still available -- yet does not interfere with the majority who does not want to wade through it. The question then is whether the SEC and the courts would view links to more complete information as the equivalent of traditional linear disclosure. Although the SEC acknowledged that the envelope theory does not work in every circumstance and has limited the theory's application in its link liability framework, it likely would view content linked together within the same disclosure document to be considered together.28 Based on this and other judicial precedent, an argument can be made that links to more detailed information can make information complete.29

Make Disclosure Easy to Skim

Investors do not read online as much as "skim" or "scan." Instead of reading text word-by-word, they tend to pick out keywords, links, and paragraphs that appear interesting. To accommodate this unique method of reading, companies should draft their disclosure with more captions and ensure that each caption is meaningful by itself. The SEC recognized this trait even for print when it forced companies to draft the captions of risk factors so that they stand on their own.30

Compared to print, captions should be clearly evident standing on their own because there is less information surrounding it to place captions in context. For example, charts and subheadings may be on the same page of a print page to provide more meaning to a caption -- those same pieces of information may be linked or on a different page online.

Each caption should fully explain what the related text means, yet be as short as possible. Typical leading articles can be omitted, such as "A," "An," or "The." The first few words should convey the most meaning of the words in the caption. Clever captions that do not convey the full and true meaning of the associated content should be avoided.

More frequent use of bullets and similar design elements is necessary to allow investors to easily scan through text. Using boldface for key words and phrases and other highlighting techniques -- such as the use of colored text -- also can assist investors to understand disclosure. As learned from the plain English initiative, "white space" can be invaluable to help investors comprehend disclosure. This is even more important online.

Even More "Plain English"

Although disclosure generally has undergone great change due to "plain English," further improvements for the Web can be made. Since investors are scanning online text, it is important that the most important message in a paragraph is disclosed in the first sentence. This follows the "inverted pyramid" principle used by most print media journalists. A paragraph should start with a short conclusion and more detail should follow. This allows investors to more easily skim paragraphs, yet still derive value from them.

In fact, these "topic sentences" should dominate the paragraph itself. "One idea per paragraph" should be an online rule of thumb. Each paragraph should have no more than three sentences, and it is perfectly fine to have paragraphs that consist of only one sentence. Whereas one or two sentences per paragraph should be the online norm, it is uncommon to find such short paragraphs in a print disclosure document.

The bottom line is that it is extremely important to draft simple sentences. Convoluted phrases and sentences are nearly impossible to untangle online. If a company must disclose details about complex matters, the disclosure should be straightforward. Complicated concepts can be more fully explained by linked content. Plain English taught the drafting community that complex matters can be explained without resorting to legalese. The same lesson should be applied even more stringently online.

Legibility

It should not even bear mentioning that online disclosure should be legible. Yet this is a common problem. The SEC's online legibility standard is fairly flexible. Companies must merely present "all required information in a format readily communicated to investors, and where indicated, in a manner reasonably calculated to draw investor attention to specific information."31 Based on this loose standard, perhaps it is not surprising that online disclosure frequently is too small, has poor resolution, or has obscuring background coloration. The most obvious examples are companies that post their ASCII EDGAR filings online -- the text in these documents is very difficult to read online due to its poor resolution.

Black and white should be the norm with sufficiently large sizes so that investors can easily read the text, even from a handheld device, if possible. Text should never move or zoom on its own. Microsoft Explorer and AOL's Netscape browsers are not compatible. Accordingly, Web pages should be HTML coded -- and tested -- in the various versions of each browser since an investor's browser dictates how a page will actually layout on its computer. This is a challenging and time consuming task but necessary to ensure that each investor can properly view the disclosure as intended.

The Pros and Cons of Multimedia

The appropriate use of multimedia can provide great benefits, particularly graphs and charts. For example, in a recent IPO, a biotech company included an effective flowchart in its prospectus to describe its product.32 Without the flowchart, most investors probably would not be able to fully comprehend its business.

Multimedia, however, should be used judiciously until more investors have broader bandwidth connections. Investors without broadband rarely access multimedia because of the associated lengthy download time. If multimedia is used, companies should clearly describe what is in the multimedia disclosure so that investors do not waste time downloading content that will not live up to their expectations. Text itself should never be rendered as images since that needlessly increases its load time. The bottom line is that the use of multimedia that is merely gratuitous frustrates investors, so any extraneous images or photos should be avoided.

In addition, it may take time for companies to learn how to derive value from using multimedia. For example, the few companies that provide video Webcasts of their analyst conference calls normally just use "talking heads." This actually detracts from an investor's experience since it does not offer anything more for investors to consider. Investors actually prefer "audio only" Webcasts to these unsophisticated videos.

Conclusion

Drafting "usable" disclosure for the Web is not difficult. There are fairly simple guidelines to follow that do not necessarily require knowledge of the technological underpinnings of the Web. While writing for the Web does require a change in old drafting habits, once mastered, companies will be providing investors with information they truly want and are capable of reading and digesting.

Notes

1. Numerous studies are mentioned throughout the best book on Web usability, Jakob Nielsen's Designing Web Usability (2000).

2. Sun Microsystems has an excellent tutorial on how to write for the Web at < color=#0000ff>http://www.sun.com/980713/webwriting/.

3. In Release No. 33-7497 (October 1, 1998), the SEC adopted the new "plain English" rule, Rule 421 of Regulation C. This rule only applies to disclosure made under the Securities Act of 1933 (Securities Act) but the Staff made clear that portions of periodic reports and proxy statements incorporated by reference also must comply with Rule 421. See Question 3 of Updated Staff Legal Bulletin 7 (July 7, 1999).

4. In Updated Staff Legal Bulletin 7 (July 7, 1999), the SEC provided 41 common comments to help companies comply with Rule 421 of Regulation C of the Securities Act.

5. In Release No. 33-7881 (August 15, 2000), the SEC mentions that it received over 6,000 comment letters after it proposed Regulation FD, most of them from retail investors.

6. Although the SEC permits companies to file their disclosure documents in HTML, relatively few companies have done it. See Release No. 33-7855 (April 24, 2000). Even if they do, some do not take advantage of the basic benefits of using HTML, such as a providing linkable table of contents or a search tool.

7. In fact, to convince the SEC that investors are ready to accept implied consent for electronic delivery, companies should be prepared to show that they have done a better job of preparing online disclosure. In Section D of Release No. 33-7856 (April 28, 2000), the SEC asked the public to comment about what circumstances indicate that implied consent should be universally applied. In response, some organizations have argued that the SEC should change its position about implied consent.

8. In Example 7 of Release No. 33-7288, the SEC made clear that companies could deliver multiple versions of the same disclosure document under certain circumstances as follows:

An investment company produces both an electronic version (such as a CD-ROM) and a paper version of its prospectus. Each version contains all information required by, and otherwise complies with, the applicable form and all other applicable provisions of the federal securities laws. The electronic version contains a movie that does not appear in the paper version. Each version of the prospectus indicates that there may be other versions of the prospectus and, if the issuer determines to make such other versions available, provides information on how to obtain such other versions. The paper version does not include a summary or transcript of the movie in the electronic version. Both versions of the prospectus are filed with the Commission as part of the company's registration statement, or separately pursuant to Rule 497. The use of either version of the prospectus to satisfy delivery requirements would be permissible. The issuer (or other party to whom the law assigns the responsibility) remains responsible for ensuring that each version satisfies applicable statutory requirements.

9. Ameritrade Holding Co., Form S-1 (SEC File No. 333-17495). The video presentation included a text legend at the beginning identifying the video as part of the statutory prospectus.

10. Rule 304 of Regulation S-T requires that companies file a script or fair and accurate description of the multimedia (but this description may not be subject to civil or antifraud liability). This script or description can either be filed as part of the SEC document itself or as an appendix at the end of the document. If an appendix is used, it should be placed at the end of the prospectus, as noted in footnote 309 of Release 33-6977 (March 18, 1993).

11. DeMaria v. Andersen 2001 Westlaw 303725 (S.D.N.Y., 00 Civ. 2337 (WHP) March 29, 2001). In this case, the plaintiff complained because the paper prospectus contained a bar graph depicting historical online publishing revenues and net losses on a quarterly basis while, in the electronic prospectus, there was only a narrative description of the bar graph and that this description contained a discrepancy. The court held that under Rule 304(b)(1), the graphic material included in the paper prospectus, but omitted from the electronic prospectus, was "deemed part of" the registration statement filed with, and declared effective by, the SEC, so that there was no cognizable claim that shares were sold in contravention of Section 5 and thus there was no violation of Section 12(a)(1).

12. In footnote 20 of Release 33-7233 (October 6, 1995), the SEC stated that:

Electronically delivered documents must be prepared, updated, and delivered consistent with the provisions of the federal securities laws in the same manner as paper documents. Regardless of whether information is delivered through paper or electronic means, it should, of course, convey all material and required information. If a paper document is required to present information in a certain order, then the electronic document should convey the information in substantially the same order. For example, in an audio or video prospectus, the information required to be on the cover page of a paper prospectus pursuant to Item 501(c) of Regulation S-K 17 C.F.R. 229.501(c) (e.g., red herring language) must be among the first information presented through the audio or video media.

13. The SEC liberalized its "order" of online content position for prospectuses when it adopted the plain English rule. Plain English, however, only applies to filings made under the Securities Act. Rule 421(a) of Regulation C under the Securities Act:

The information required in a prospectus need not follow the order of the items or other requirements in the form. Such information shall not, however, be set forth in such fashion as to obscure any of the required information or any information necessary to keep the required information from being incomplete or misleading. Where an item requires information to be given in a prospectus in tabular form it shall be given in substantially the tabular form specified in the item.

14. The SEC's statement about framed links is in ns.59 -- 60 and accompanying text of Release 33-7856 (May 4, 2000).

15. In the text accompanying footnote 22 in Release No. 33-7233 (October 9, 1995), the SEC analogized to paper delivery by requiring companies to provide investors with an opportunity to retain a permanent record of any electronically delivered information.

16. Using informative page titles is important if a company uses a search engine that displays search results to navigate a document. In HTML, each page has a title in the "header" section that specifies what the page's content is about.

17. The weakness of most search engines is that they do not include spell checks or synonym expansion. If these functions are available, they are invaluable since investors may have difficulty spell checking their own typing or thinking of synonyms for search terms.

18. A new feature -- the "link title" -- is available with Internet Explorer 4.0 and newer versions. When a mouse hovers over a link, a "link title" pops up that contains explanatory information about the related content.

19. The SEC addressed third-party content in footnote 57 and accompanying text as well as Example 6 of Release 33-7856 (May 4, 2000). Rule 105 of Regulation S-T addresses the liability for content linked from a filed document.

20. Example 6 of Release 33-7856 (May 4, 2000) emphasizes the need to file third-party consents under Rule 436(a) in many cases. Rule 437 provides that a company may apply to the SEC Staff to not require a consent, but the company must provide an affidavit that obtaining the consent is impractical or involves undue hardship, and the Staff rarely grants such applications.

21. A series of Web usability studies from the 1997 International Journal of Human Computer Studies is available at < color=#0000ff>http://ijhcs.open.ac.uk/.

22. Items 501 of Regulation S-K and Regulation S-B set forth the requirements for the outside front cover page for disclosure documents filed with the SEC. Note that glossy annual reports are not required to be filed with the SEC -- merely submitted. As a result, companies are free to innovate subject to antifraud considerations.

23. Aggregation is combining similar disclosures in one place on the homepage. Summarization is self-explanatory and can be used more often with linked pages that have more detail. Filtering is removing any content that does not add value to the homepage. Truncation is the use of only initials or initial words from common words or phrases to save valuable space -- note that truncation may render some statements so incomprehensible that disclosure becomes misleading.

24. For example, a list of key financial ratios with links to a company's financial statements and related notes.

25. "Loading" (response time) is how long it takes for content to appear on a Web page that is selected by an investor.

26. See pp. 42 -- 48 of Jakob Nielsen's Designing Web Usability (2000).

27. Id. pp. 101 -- 104. Note that monitors with 300 dpi resolution -- which makes the online reading experience akin to reading paper -- are now available but expensive. Once their prices come down, this issue likely will be solved.

28. The "envelope" theory provides that content linked together is considered as if it was mailed in the same envelope. The SEC first introduced this theory in Example 15 and Example 16 in Release 33-7233 (October 6, 1995). The SEC limited the theory's application in Section II.A.4 of Release 33-7856 (May 4, 2000).

29. In Rasheedi v. Cree Research, Inc., (Middle D.N.C., Oct. 17, 1997), the US District Court for the Middle District of North Carolina ruled that forward-looking statements accompanied by cautionary language may qualify for the safe harbor provided by the Private Securities Litigation Reform Act of 1995 even if the cautionary language does not identify the specific factor that ultimately caused the forward-looking statements not to come true.

30. As part of the plain English initiative, Item 503(c) of Regulation S-K was amended to require companies to use subheadings that adequately describe the risk that follows. In Updated Staff Legal Bulletin 7 (July 7, 1999), the SEC stated, "Item 503(c) seems to be the least understood of the plain English requirements." In that Bulletin, the SEC provided sample risk factor disclosures and subheadings to help companies comply with Item 503(c).

31. Rule 420(b) of Regulation C under the Securities Act states:

Where a prospectus is distributed through an electronic medium, issuers may satisfy legibility requirements applicable to printed documents, such as paper size, type size and , boldface type, italics and red ink, by presenting all required information in a format readily communicated to investors, and where indicated, in a manner reasonably calculated to draw investor attention to specific information.

32. The flowchart is on p. 36 of Seattle Genetics' Pre-Effective Amendment No. 5 to Form S-1 filed March 6, 2001 (File No. 333-50266).