Free stock offerings on the Internet are "illegal more often than not" because they represent the unregistered sale of securities, according to the Staff of the Securities and Exchange Commission ("SEC"). Speaking before the National Press Club recently, SEC Enforcement Director Richard Walker echoed comments made by the agency's Staff in two letters issued earlier this year. In both letters, the SEC's Staff concluded that proposed Internet free stock give-aways would violate Section 5 of the Securities Act of 1933 (the "1933 Act") unless the issuance was made subject to a registration statement or a valid exemption from registration.
The first letter was issued by the Staff of the SEC's Division of Market Regulation on January 27, 1999. There, an unnamed company proposing to operate and maintain an Internet-based auto referral service sought SEC Staff guidance on its plan to give free shares of common stock to anyone who visited the company's web site and completed a registration form. Registered individuals who referred others to the web site would receive additional shares under the proposal. The company stated that these non-transferable shares would initially be issued without a certificate, would have only nominal par value (e.g., $.001), and would be distributed with an information statement disclosing that no market existed for the securities. Because the shares would not be issued for value, the company asserted that the proposed give-away would not constitute an "offer" under Section 2(a)(3) of the 1933 Act and hence would not have to be registered under Section 5 thereunder. The SEC Staff disagreed. Under the facts presented, the Staff concluded that "the issuance of securities in consideration of a person's registration on or visit to an issuer's Internet site would be an event of sale within the meaning of Section 2(a)(3)." Accordingly, without proper registration or a valid exemption from registration, the proposed give-away would violate Section 5.
In the second letter issued on February 4, 1999, the Staff of the SEC's Division of Corporation Finance reached a similar conclusion concerning Simplystocks.com's plan to market its products via a free stock give-away over the Internet. Simplystocks.com is a non-publicly traded California corporation based in San Diego that sells SEC Edgar Database information in a "standardized format" for individual and institutional investment research use. Under the company's proposed plan, customers who logged onto the Simplystocks.com web site and completed a registration form during a special 180-day marketing period would be entered into a lottery for the company's stock. Individuals randomly selected from the pool would ultimately share equally in 8% of the company's issued stock. Another 2% of the stock would be given to one individual chosen from the lot. The SEC Staff responded that "based on the facts presented" the issuance of securities "in consideration of a person's registration on or visit to an issuer's internet site" would constitute an event of sale under Section 2(3) of the 1933 Act and would violate Section 5 thereunder unless it was subject to a registration statement or a valid exemption from registration. *
Vanderkam & Sanders, SEC No-Action Letter (avail. Jan. 27, 1999); Simplystocks.com, SEC No-Action Letter (avail. Feb. 4, 1999).