Securities On-Line

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...

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