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Denis T. Rice, July 1998

I. Introduction.

A. Background: Information and Communication Capabilities of the Internet.

The Internet began in the 1960's as a decentralized, packet-switched network of computers funded by the Department of Defense, intended to facilitate communication in the United States in the event of a nuclear attack. In the late 1970's, universities and other nongovernmental entities started linking with the Department of Defense net. By the late 1980's there were multiple computer networks joined together in an "Internet." It allowed "e-mail" communications to be sent electronically over the Internet to one or more specific addresses, or even mass mailed, i.e., the message can be sent electronically to large numbers of addresses.

Among other Internet applications, the World Wide Web is the most popular. The World Wide Web consists of a vast network of Web "sites," i.e., graphical presentations of information controlled by the site-holder. Sites can contain pictures, text and sound in static or moving form. The World Wide Web brings together file transfer protocol, hypertext files, e-mail and other resources linked together on a global basis.

Other Internet applications important for disseminating information are the bulletin board and mailing list. The bulletin board (also called a "newsgroup"), unlike a Web site, is generally controlled by more than a single person. The bulletin board allows written messages, responses and new messages from a number of persons to be posted or downloaded from a given Internet location. The mailing list provides a way for network users who share interest in a given topic to exchange messages by sending a message to a central address where it is automatically rebroadcast to all other participants. Another capability relevant to securities transactions is "push" technology, which allows information to be sent through the Internet to pre-selected viewers automatically without the necessity of their logging on to a particular Web site or bulletin board.

B. The Mushrooming Use of the Internet for Securities Transactions.

The foregoing Internet applications, particularly the World Wide Web, create a dramatically new environment for companies issuing securities, brokerage firms and other intermediaries, and investors. Web sites, bulletin boards, e-mail and push technology can all be used in advertising, offering and selling securities and for disseminating investment advice. They permit communication instantaneously with millions of people worldwide at low cost. They allow matching proposed trades and circulating information in broad-based markets. They also permit individuals to access massive amounts of information far more quickly and directly than was believed possible just a few years ago.

Marketing of securities on the Internet in the mid-1990. In 1995 a micro-brewery called "Spring Street Brewing" became the first issuer to offer stock to the public directly online by posting offering materials on its Web site. In early 1996, Spring Street Brewing generated widespread attention by its attempt to create a Web bulletin board for secondary trading in its stock. The financial press gave extensive coverage to the difficulties Spring Street encountered with the U.S. Securities and Exchange Commission ("SEC"). A number of small discount brokers had also started online secondary trading in 1995, and their the number gradually swelled over the ensuing.

Developments in cyberfinance have virtually exploded since these early entries. Dozens of new Web sites have been introduced allowing dissemination of material on securities issuance, both for underwritten public offerings and public offerings conducted directly by issuers themselves. Electronic bulletin boards have been created for secondary trading directly among investors. Data banks containing names of potential investors for private, public and overseas offerings have been generated. The Web has increasingly become a hub for online trading through broker-dealers and dissemination of vast amounts of financial information by mutual funds and investment advisers.

The following overview of cybersecurities explores the use of Internet (1) for issuance of new securities, both publicly and privately; (2) for secondary trading in already-issued securities; and (3) as a powerful new information tool. It also addresses the new jurisdictional and regulatory implications the development of cypersecurities.

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