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Skip Navigation LinksHome :: Back Issues :: Web issues stretch the law firms

March 2000

Web issues stretch the law firms


Online offerings present new challenges to financial lawyers, not least issues of security, jurisdiction and accuracy.




       
With online debt and equity offerings growing in volume, bankers and lawyers are rapidly having to adjust their thinking to new sets of rules - official and unofficial.
Wall Street, Europe - and increasingly Asia - appear to have decided to embrace online offerings as the way forward and there has been aggressive online marketing of bond issues. Ford Credit's $1.2 billion debt issue in January was the first time a bulge-bracket underwriter, Lehman Brothers, had helped a major US corporation to raise debt via the web, and it was just one in a series of online landmarks claimed by underwriters. Some of these online offerings have been limited to institutional investors but the World Bank's $3 billion global in mid-January was a break-through deal - open to both retail and institutional investors. Goldman Sachs, the World Bank's sole bookrunner, reported that more than a third of the total issue was sold on the web, the highest proportion on any online offering to date.
Online equity offerings have been around for longer, and corporate finance lawyers have had to adapt to this new way of doing business. Although the laws involved may not themselves be too different, the techniques and jargon required to demonstrate online competence and credibility are a world away from their traditional heartland.
For those that successfully embrace this new way of doing business, however, the rewards are great. Debt market participants predict that most future offerings will carry an e-tranche alongside a traditional tranche and online applications for equity issues provide a cost-effective way of reaching the retail investment community. They will proliferate.
The World Bank deal featured a transparent process whereby issuers and investors watched the deal book assemble in real time. If these techniques become the norm, much of the value bankers extract from their proprietary information will be wiped out. It will inevitably become cheaper to issue to retail investors and, as investment bankers are fully aware, issuers will have a strong hand in fee negotiations once they have their own direct link to institutional and retail investors.
For lawyers, however, the offering documentation and prospectuses still have to be prepared and due diligence done - whether the offer is online, traditional, or some combination of the two.
In the past year, Credit Suisse First Boston has been in the thick of headline deals and London law firm Herbert Smith has advised it on three of them - initial public offerings for internet service provider Freeserve, online auction house QXL and, last month, financial information website interactive investor international (iii). Two of these IPOs, Freeserve and iii, broke records and underlined the power of online offerings. The iii retail offer was the UK's most popular to date, being oversubscribed 26 times. Freeserve was also heavily subscribed.
Martina Asmar, a corporate finance partner at Herbert Smith, has been closely involved in all of these online offerings. They represent a sometimes uneasy juggling of requirements of the law and the practicalities of the internet, she says. "When we advise on these deals," she says, "we have to pay very close attention to the structure and content of the website and the way in which online facilities are used. With Freeserve, QXL and interactive investor international, we were able to put online registration facilities on their existing websites."
From a legal perspective, she explains, the internet must be viewed as just another way of disseminating information: "It is a means of communicating the same information as you would post through someone's letterbox - just in a different format." However, the global reach of the internet means it is crucial to limit offers to residents in certain jurisdictions. "It is just not feasible to do a blue-sky survey in each jurisdiction where the site could be accessed to see who might be eligible. Instead, we restrict access to the offer to residents in particular jurisdictions using screening pages and electronic postcode checks when applicants register to assess geographical location and determine eligibility."
A difficulty for lawyers stems from the fact that many internet companies are still in their infancy and their strategy heavily depends on marketing both their service and their shares. To the companies themselves it seems smart to use the publicity surrounding a share offer to market their actual product.
For lawyers trained to be wary of being accused of using any potentially mis-leading statements to condition the market to buy shares, this is an uncomfortable combination.
It is vital to ensure that investors have access to the prospectus before registering for the offering, and, from a legal perspective, because information on the issuer's website may itself make up part of the offer documentation, it is also crucial to ensure that its content is accurate. Clearly this involves a tricky balancing act. "It is important that the information on the offering - as well as the rest of the website - should be free from hype," says Asmar. "This is sometimes easier said than done when dealing with this particular sector."
Security is another critical issue in an online offering - it is important that the site should be sufficiently robust to withstand high traffic levels, and as far as possible protected from hackers. The enormous amounts of personal information held on an IPO website make this an urgent priority.
It is also important that investors' questions can be adequately answered in the run-up to an IPO launch. Bearing in mind the extended reach of an online offering (and the limited resources of many technology sector issuers), it is infeasible to handle telephone enquiries, particularly as the issuer should not be giving investment advice. Instead, in line with internet convention, a set of frequently-asked questions and answers (FAQs), can be posted on the website and regularly updated if necessary.
When Goldman Sachs missed the opportunity of bringing Freeserve to market last year - because of the comparatively conservative timetable it suggested for the flotation - it underlined just how rapidly this market expects its demands to be met.
It will be interesting to see how effectively lawyers manage to communicate their internet readiness to this new breed of issuers.







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