1. Introduction and Jurisdiction
All over the world governments are struggling to regulate financial services on the Internet. Almost every day there is news on how a government is about to structure Internet regulation. Everyone is aware that it is crucial to get the regulations right. Otherwise, investors may boycott the country and the development of the Internet as a new, important means of communication is jeopardized. Many different – national and international – interests have to be taken into consideration. Regulations cannot be technology-specific. This is a true challenge for all legislators.
(1.1) The general view in Sweden is that the Internet is just another means of communication. Accordingly, activities on the Internet are normally subject to legislation of general application. This also applies to the securities market. Thus, there are no specific Acts or regulations issued by the Swedish Financial Supervisory Authority (SFSA), regulating securities and the Internet. However, in a policy statement directed to Swedish brokers, the exchanges etc. the SFSA has informed these parties of the manner in which, in the view of the SFSA, technical and administrative issues should be handled as regards securities trading over the Internet.
Furthermore, NOREX, an alliance between the most important Nordic exchanges, of which OM Stockholm Exchange - Sweden’s largest and most important exchange - is a participant has a mandatory agreement with the members of the exchanges. This agreement called the NOREX Member Rules thus applies to on-line brokers conducting business on the exchanges. According to the agreement, it is the brokers, and not their clients, who are responsible for the correct execution of the trade made by the client. The agreement also regulates some technical and administrative issues. The agreement is in effect as from October 2001.
Apart from the above, there are no rules or regulations enacted by any self-regulatory organisation dealing specifically with securities and the Internet. However, the Swedish Securities Dealers Association is currently preparing guidelines for on-line brokers. These guidelines are expected to be issued in November 2001.
(1.2) The question of whether or not Swedish law will apply when a Swedish resident trades securities over the Internet is not easily answered. As mentioned above, the general view in Sweden is that the Internet is just another means of communication and, consequently, general regulations as opposed to specific, Internet-regulations, should normally govern activities on the Internet. Furthermore, the above question has not been the subject of judicial scrutiny. Hence, the following amounts to no more than an educated guess.
As regards the question of which state’s law shall apply to prospectuses issued on-line, i.e. which law shall govern the form of the prospectus, and the liability thereof, it has been considered that only one single law shall be applicable. Thus, if Swedish law governs a prospectus, Swedish law shall also govern the liability of brokers and others who have been engaged in producing the prospectus. This approach will avoid the problem of the applicability of different laws on prospectuses with international characteristics.
In any event, it has been considered reasonable that the law which governs the issuing company’s internal affairs (lex corporationis) also shall govern the liability issue when securities, purely by coincidence, have been subscribed for by investors in another state than that of the company’s. This enables a coherent view on the matters of law, which may arise during the issue and, at the same time, provides the company, its shareholders, and creditors with information concerning which conditions have to be met by the prospectus. Furthermore, it is reasonable that investors who locate a foreign investment object check and adjust to the foreign rules that apply to the transaction.
These considerations are very relevant for prospectuses regarding new issues of securities available on the Internet. An important purpose in context is to attain a large, in particular geographic, dissemination at low cost. It is quite possible that persons who sign up for securities come from the most unexpected places on earth. When issuing the prospectus, it would be very time consuming and costly to ascertain the contents and meet all the formal requirements that different jurisdictions may have on the publishing of a prospectus. An exclusive application of lex corporationis would therefore benefit the Internet and international trade in securities. However, it is uncertain whether this perspective will be recognised by the courts, which may feel bound to the traditional lex loci delicti rule and the place of the tortious act, or the place of the effect, as guidelines to the choice of law.
According to the SFSA, the question of whether Swedish law shall govern a prospectus and thus the liability of brokers and others who have been engaged in producing the prospectus shall be resolved as follows. Swedish law shall govern a prospectus issued by a Swedish company (lex corporationis), except where the prospectus is undoubtedly solely directed at persons other than Swedish residents. This also applies when a foreign company issues the securities, but the offering, in reality, refers to a Swedish company. This is the case e.g. when a non-operating foreign company, the only assets of which are shares in an operating Swedish company, issues securities. Furthermore, Swedish law shall govern a prospectus issued by a foreign company: (1) if Sweden is one of the states to which the prospectus is expressly directed; (2) if it is stated in the prospectus that the relevant securities will be listed on a Swedish exchange at any time in the future; (3) if the prospectus is published on a Swedish company’s web site; (4) if the prospectus published on the Internet is written in the Swedish language; (5) if a Swedish undertaking acts as an underwriter, or is to receive application forms; or, finally, (6) if some marketing features, other than publishing the prospectus on the Internet, are directed at a substantial number of Swedish investors.
As regards the question of which state’s law shall govern a secondary trade in securities - where the contract between the parties is silent as regards the choice of law (see below under section 1.4) - the prevailing view in Sweden is that the law to which the contract has its closest and most relevant connection shall be applied (the so-called "individualising method"). The choice of law in the individual case is based on the special factors present in that case and it can thus be difficult to predict the result. The presence of one or more of the following factors may result in the contract being subject to Swedish law: (1) the trade was made on a Swedish exchange; (2) the trade was mediated by a Swedish broker; (3) the parties - as is seldom the case, however, regarding securities trading over an exchange or the Internet - were aware of each others residence and one of the parties, particularly the seller, had his residence in Sweden; (4) the settlement was made in the Swedish currency (SEK); (5) the contract was concluded in the Swedish language; or (6) the securities were governed by Swedish law (e.g. the issuing company is a Swedish company). It must be emphasised that these factors are only examples of connecting factors, and that the presence of one or more of them does not automatically mean that Swedish law will be applicable. Furthermore, the factors mentioned above are of different weight, whereas the fact that the trade was made on a Swedish exchange is a very strong factor, the fact that the settlement was made in Swedish currency does not have the same weight.
(1.3) In principle, the answer above will not be any different where the Swedish resident was a sophisticated investor, the securities were of a particular type or the counter party was resident in a particular state. However, factors such as the aforementioned may be relevant, of course, in deciding as to which jurisdiction a contract has its closest and most relevant connection.
(1.4) Swedish regulations concerning personal property, to which sales of securities are appurtenant, are largely discretionary. Hence, Swedish courts will normally accept a clause in a contract relating to securities transactions over the Internet that provides that a foreign law shall govern the contract. However, where the buyer is a consumer, the courts will not accept a clause in a contract closed at a distance (e.g. the Internet), stipulating that a law other than that of an European Economic Area (EEA) state shall govern the contract if the law that would otherwise govern the contract is that of an EEA state that gives the consumer a better protection than the law stipulated in the contract. Swedish courts normally accept a clause in a contract relating to securities transactions over the Internet providing that disputes shall be referred to the jurisdiction of a foreign court.
According to the accepted Swedish view, the manner in which a governing law clause has to be concluded, in order to be effective, is governed by the proper law of the contract (lex obligationis). Therefore, the question of the manner in which such clauses have to be concluded to be effective cannot be examined in any greater detail. However, some points will be made regarding the case of the proper law of the contract being Swedish law. Under Swedish law, such an aforementioned clause has, of course, to be agreed upon by both parties. If the contract is a standard agreement (boilerplate) drawn up by one of the parties (or by an association or suchlike of which that party is a member) - as may often be the case as regards securities trading on an exchange or over the Internet - such a clause may have to be specifically brought to the attention of the other party to be incorporated. The clause does not have to be in writing.
It should be noted that the above is only the case in respect of the property law aspects of a sale of securities. Swedish law in the field of public (as opposed to private) and consumer issues - as e.g. prudential rules and rules of conduct relating to banking, exchanges, securities business, clearing operations, etc. - is mandatory. Hence, if Swedish law is applicable, the parties to a contract relating to securities transactions over the Internet may not regulate issues of e.g. a party’s obligations, if it is a broker, to report the deal made with the other party to the exchange on which the security is listed (see below under Section 3.4). Such a clause will thus not be enforceable under Swedish law.
The manner in which a clause stipulating that a dispute shall come under the jurisdiction of a foreign court has to be concluded, in order to have effect, is, according to the accepted Swedish view, to be governed by the law of the state where the case is being heard (lex fori). If the case is being heard in Sweden, the only provision, in addition to what has been mentioned above as regards clauses on applicable law, is that the clause must be in writing. It is uncertain if a contract concluded over the Internet can be regarded as being in "writing" and, accordingly, it is uncertain whether such a clause may form a part of an on-line contract.
2. Primary Offerings – New Issues of Securities over the Internet
(2.1) A company that wishes to make a new issue of securities is required to draw up a prospectus if the aggregate of the sum that may be paid by the investors, as a result of the offer, amounts to at least SEK 300,000 (approximately USD 28,000) and a substantial number of persons (exceeding 200) are invited, or if the number of persons to whom the invitation is directed are not specified or are otherwise unknown by the company at the time the offer is made. Conversely, depending on whether the offer is made to a substantial number of persons or, on the other hand, to an unspecified or unknown number of persons, different sets of rules may apply. However, in most cases both these different sets of rules will apply with respect to the same new issue of securities since an offer made to an unspecified number of persons would usually also be made to a substantial number of persons. Therefore, the question is hereinafter dealt with on the basis that both these sets of rules apply concurrently.
The prospectus produced by a company carrying out a new issue of securities has to be submitted to the SFSA together with an application for registration. Such a filing must be made in paper form. The prospectus shall thereafter be published or the public shall be made aware of its existence through one or more national newspapers, before it may be published on the Internet. Thus, as regards delivery of the prospectus, a new issue of securities may not be made solely over the Internet. However, the Companies Act contains a provision that could be construed as an obligation to, in certain circumstances, publish the prospectus over the Internet. Chapter 4 § 25 of the Companies Act stipulates that the prospectus shall be published at the places where subscription or purchase orders are received.
Thus, if subscription and purchase orders are only received over the Internet, this could be construed as such an obligation to publish the prospectus over the Internet. However, the provision in question was not drafted with Internet offerings in mind, and to our information this question has not been tried in practise. It should be noted that the prospectus published over the Internet is subject to the same rules as a prospectus in paper form. Accordingly, the prospectus published over the Internet may not vary from the one submitted to the SFSA.
As regards the subscription and clearance procedure, different sets of rules apply depending on whether the securities are dematerialised or not. For a company to be listed on an exchange, its shares and other issued securities have to be dematerialised. Thus, the rules regulating dematerialised securities are, in practice, far more important then the rules regulating non-dematerialised securities.
As regards dematerialised securities, there are no provisions preventing the subscription procedure from being conducted on-line. Nor are there any clearance procedure provisions preventing a new issue of dematerialised securities from being made over the Internet. The issuing company has to report the issue and the new owner of the securities to, in principle, a central securities depository or an account-operating institution. In practice, however, such a report is never made directly to a central securities depository, but always to an account-operating institution. The account-operating institution then reports on-line to the central securities depository, which then executes the clearing and settlement. As regards the question of whether or not the issuing company can submit the aforementioned report to the account-operating institution over the Internet, the account-operating institution itself decides whether that will be possible. Few account-operating institutions accept the submission of the report over the Internet, but some do. It is thus possible, in theory as well as in practice, to handle the clearing and settlement procedure over the Internet.
As regards non-dematerialised securities there are, as in the case of dematerialised securities, no provisions preventing the subscription procedure from being conducted on-line. However, there are provisions that prevent a new issue of securities from being made over the Internet in practice. Settlement for non-dematerialised securities involves a material transfer of the securities to the investors. Such a transfer can obviously not be made over the Internet. As regards non-dematerialised shares, it is uncertain whether or not a subscription for new shares can be made over the Internet. The possibility to make a subscription for new shares over the Internet by way of on-line payment, as is possible when dematerialised shares are issued, is in any event not available when a new issue of non-dematerialised shares is made.
(2.2) To this date, only a few companies have conducted new issues of securities exclusively over the Internet. Most, if not all, of the companies that have carried out such new issues, as well as the brokers, banks and account-operating institutions that have participated in these new issues, are medium or small companies and institutions. Therefore, the practical impact of these offerings has so far been limited. Notwithstanding the fact that few companies have made new issues of securities exclusively over the Internet, most companies making public offerings do in fact publish the relevant prospectus on the Internet. Thus, the practical impact of the Internet in terms of the general securities market has been immense.
The offers actually made exclusively over the Internet have mostly been offers to buy shares to be issued. The Internet has, however, also been used to facilitate offerings of other types of securities. For example, the Swedish National Debt Office has issued premium bonds over the Internet.
(2.3) In Sweden, the Internet is being used to a considerable extent for the marketing of new issues. The same rules apply to these on-line marketing features as to traditional, i.e. non-Internet marketing of new issues. As regards the liability in damages of persons responsible for the content of web sites who supply inaccurate or misleading information or advice to investors, different sets of rules apply depending on whether or not the marketing features form part of a contractual relationship between the provider and the investor. If the marketing features are not part of a present or future contractual relationship between the provider of the features and the investor, the provider can be liable only if the misrepresentation constitutes a crime, such as e.g. fraud, or the investor, inter alia, had particular grounds to rely upon the information. If the marketing features are, or form part of, a contractual relationship between the provider of the marketing and the investor, the provider will be liable for loss unless he can prove that the reason for the misrepresentation was outside his control. The damages, which the provider responsible for the marketing features on the site may have to pay in this respect, consist of a sum equal to the loss, including loss of profit, suffered by the client as a consequence of the misrepresentation. The provider can, however, exclude liability by agreement.
3. Secondary Trading and the Responsibilities of Intermediaries
(3.1) The availability of on-line securities trading in Sweden is extensive. Although the possibility to trade directly on-line at the exchanges is still closed to ordinary investors, there are a lot of Internet brokers trading securities for investors in such a way that the investors in fact have the same possibility as ordinary dealers to trade on the exchanges. Trading over the Internet is not only possible on the spot market but also on the derivatives market.
About twenty-five (25) per cent of all transactions on the securities exchanges are conducted over the Internet. That is one of the highest percentages of on-line securities trading in the world, even exceeding that of the US. It is mostly private individuals who are trading over the Internet.
(3.2) A dealer - whether resident in Sweden or not - is not required to be licensed with the SFSA as long as it does not provide services to investors in Sweden. If a dealer provides services to investors, e.g. by acting as a market maker, it must be licensed with the SFSA. However, a non-resident dealer is only required to register with the SFSA where it is deemed to be conducting securities business in Sweden. There are, however, no express rules regulating whether or not a dealer located outside Sweden conducting such services over the Internet with Swedish investors would actually be considered as conducting securities business in Sweden. In any case, if a dealer that provides services to Swedish investors is considered to conduct securities business in Sweden, different sets of rules apply, depending on whether the dealer is located in an EEA state or in a non-EEA state.
If the dealer is located in an EEA state, the dealer does not need a licence to conduct securities business in Sweden, provided that it is licensed or authorized in that EEA state, and need only be registered with the SFSA. The registration procedure is quite simple since the SFSA only has to be notified by the supervisory authority in that EEA state, prior to the commencement of the securities business in Sweden.
If the dealer is located in a non-EEA state, it must be licensed by the SFSA. Such a dealer may, as opposed to a dealer located in an EEA state, not conduct trading in Sweden directly from its location abroad, but is required to conduct its business from a branch office located in Sweden.
Apart from the rules mentioned above, there are no special rules in the context of securities law that apply only to non-resident dealers. A dealer is e.g. not required to be able to speak Swedish.
A broker located outside Sweden that deals in securities with Swedish investors would generally be considered as conducting securities business in Sweden, and would thus be required to observe the general conduct of business rules. However, there are no express rules that provide that a broker conducting business over the Internet with Swedish investors would be considered to conduct securities business in Sweden. The SFSA has, according to our experience, quite a generous view towards overseas firms in these cases. The SFSA normally considers the site of the securities business to be decisive on the issue of whether Swedish law applies. Nevertheless, it must be noted that it is uncertain whether or not the SFSA would actually maintain this generous view in an individual case.
(3.3) Generally, a broker is subject to the same rules irrespective of whether it is conducting securities business over the Internet, or in a traditional way, i.e. not using computer networks such as the Internet.
Thus, a member of the board or an employee of a broker firm who, in that capacity, gains knowledge of a client’s business or personal circumstances may not disclose such knowledge or make use thereof against the interests of the client.
Furthermore, the rules of conduct applicable to brokers in general also apply in relation to dealings over the Internet. Thus, a broker should seek information from its clients regarding their economic situation, experience of the securities market, and their objectives as regards the services requested. The broker is, however, not obliged to refuse to deal with investors that do not have sufficient knowledge, or the economic means, to trade in securities.
In addition to the above, in order to prevent money laundering, a broker must check the identity of a person who wants to form a business relationship with the broker. If a person does not want to commence an actual business relationship with the broker, but only make occasional deals with the broker, the broker still has to check the identity of that person if the deal involves an amount exceeding SEK 110,000 (approximately USD 10,500), or if the deal could be suspected to be a money laundry transaction. A broker should also examine all transactions where money laundering is suspected, and report all such transactions to the police. A broker located outside Sweden that deals in securities with Swedish investors over the Internet is, however, not subject to these rules, provided that the business is not conducted from a permanent establishment in Sweden.
A broker located in Sweden is subject to the general rules on data protection. A broker located outside Sweden that deals in securities with Swedish investors over the Internet is, however, not subject to these rules provided that the broker, if located in a non-EEA state, does not use equipment located in Sweden to process personal data. A broker subject to the data protection rules is only permitted to process personal data for specific, explicitly stated and justified purposes, such as, inter alia, processing of personal data in conjunction with mediation of securities in a computerised trading system. In general, such processing of personal data is only permitted if the person registered, i.e. the investor, gives his consent. However, there are several exceptions to this rule applicable to broker operations, e.g. if it is necessary when a task of public importance is to be performed, or in order for a contract with the person registered to be performed. The processing of personal data must be notified to the Swedish Data Inspection Board.
(3.4) A broker is not required to trade with its clients through an exchange but is permitted to deal with them directly on-line. However, the broker has to immediately report all deals made with its clients regarding a particular security to the exchange on which that security is listed. This is to ensure an adequate degree of transparency on the securities market.
During such time when suspension of trading remains in force, a broker is not permitted to trade with its clients directly on-line in the security to which the suspension refers, nor may it assist its client trading in that security. The broker is, however, permitted to complete a transaction previously entered into.
(3.5) An on-line broker has the same responsibilities with respect to "best execution" of trades as an ordinary broker. Although there are no express rules as regards "best execution" of trades, the generally accepted view is that a broker is obliged to execute a trade in the best possible way. In any case, a broker is required to act with due skill, care and promptness and in an honest and fair manner in its operations, and thus avoid conflicts of interest and, if such should occur, ensure that its clients are fairly treated.
A broker may be liable for delayed or lost trade. Such liability will of course not occur if the broker can show that the reason for the delayed or lost trade was beyond its control. The damages the broker may have to pay in this respect consist of a sum equal to the loss, including loss of profit, suffered by the client as a consequence of the delayed or lost trade. As regards non-consumer relations, the broker may, however, exclude liability by agreement. In consumer relations, it is plausible to think that a broker may not be permitted to exclude all liability. The question has, however, only been dealt with by the Swedish National Board for Consumer Complaints inasmuch as the liability regards damage resulting from, the very relevant question as regards on-line brokers, an interruption in the public telecommunications. In this case, the Board held that it was possible for a broker to exclude liability by agreement. Finally, it should be noted that there is an accepted practice that a client must mitigate his loss.
4. Information and Advice On-line
(4.1) Public companies in general are not required to file corporate or financial information with the SFSA. However, public companies that conduct e.g. banking or securities business are required to file corporate and financial information with the SFSA. Such filing may be conducted over the Internet.
Public companies are not required to deliver corporate or financial information to the investors. They are, however, required to file some corporate and financial information, e.g. annual and interim reports, with the Swedish Patent and Registration Office, where such information is available to the public and thereby to the investors. Listed public companies are also required to make public disclosure of any information about business activities and securities, which could affect the valuation of the company’s securities listed on an exchange. Information so filed is available on-line. (Some information filed with the securities exchanges, e.g. disclosures of decisions or events which are intended to significantly affect the valuation of the company securities listed with the exchange, are available on-line.)
Apart from information regarding insiders, information filed with the SFSA is not available on-line.
(4.2) Information provided by a listed public company on its web site has to be true and reliable where such constitutes a disclosure of any decision or event that is intended to significantly affect the valuation of the company’s securities listed on an exchange. If a public company - listed or non-listed - chooses to make public its annual report in its entirety on the company’s web site, the publication shall be the audited annual report. If a public company chooses to make public an incomplete annual report on its web site, there must be a statement in the publication which states that the information provided is not the complete annual report. For other companies, information provided by a company on its web site, while not in the course of distributing securities, is subject to general provisions regarding e.g. marketing.
The aforementioned also applies to a company distributing securities. However, if the company makes a public offering for the sale of securities and thereby issues a prospectus on its web site, the information provided therein is subject to additional sets of rules. In short, a company issuing a prospectus must publish all details and assessments that may materially influence the valuation of the company. The contents of the prospectus must reflect the industrial sector of the company, as well as the specific circumstances pertaining to such industrial sector.
As regards the liability in damages of persons responsible for the content of a web site that contains a misrepresentation, such liability arises only if the misrepresentation constitutes a crime, such as e.g. fraud. This is also the case where a prospectus on a web site contains a misrepresentation.
(4.3) There are no specific rules regulating the activities of suppliers of investment information, analytical tools or advice, irrespective of whether the information or advice is provided on-line or in a traditional manner. However, such suppliers of information and advice are, like all other persons, subject to the general regulations concerning insider dealing and undue price manipulation.
Thus, a supplier of information or advice who, by virtue of his employment, duties, or any other position whereby he normally becomes aware of circumstances which are of significance for the price of securities, thereby obtains information or knowledge regarding a circumstance which has not been made public, and which is likely to have a significant effect upon the price of securities is, until such time as the information is made public or has ceased to have significance for the price, not allowed to use the information or knowledge in order to advise, or in any other manner, cause a third party to purchase or sell securities as referred to therein. Nor is an investor who is informed by such a supplier of information etc. allowed to trade in the affected securities on the securities market until such time as the information has become publicly known or has ceased to have significance for the price. A person who does not comply with these rules may be sentenced to a maximum term of imprisonment of four years. However, there is in principle no civil liability under Swedish law.
The aforementioned also applies where a supplier of information or advice, in conjunction with trading on the securities market, with the intention to unduly influence the price of securities, causes any other person to enter into a buy or sell agreement, to submit an offer for the conclusion of such agreement, or to adopt any other similar measure, where such measure is intended to mislead buyers and sellers of securities. Examples of such unlawful undue manipulations are "scalping" and "pegging".
As regards the liability in damages of persons responsible for the content of web sites that supply inaccurate or misleading information or advice to investors, different sets of rules apply depending on whether the service is provided for free or on a fee-paying basis.
If the service is provided for free, the person responsible for the content of the web site can be liable only if the misrepresentation constitutes a crime, such as e.g. fraud, or the person receiving the information or advice, inter alia, had particular grounds to rely upon the information.
If the service is provided on a fee-paying basis, the person responsible for the content of the web site will be liable for any loss sustained unless he can prove that the reason for the misrepresentation was outside his control. The damages the person responsible for the content of the site may have to pay in this respect consist of a sum equal to the loss, including loss of profit, suffered by the client as a consequence of the misrepresentation. The person responsible for the content of the site may, however, exclude liability by agreement. As regards consumer relations, the person responsible for the content of the web site may, however, not be able to exclude liability to such a significant degree (see above under section 3.5).
(4.4) In general, a person who assists in the commission of a crime by making Internet communications possible is treated like any other accessory. In addition to the above, there are special rules regulating bulletin board systems. According to these rules, hosts of sites offering bulletin boards are required to remove messages that clearly constitute public order offences or constitute infringements of intellectual property rights. If the host does not comply with these rules, he can be sentenced to a maximum term of imprisonment of two years.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.