NEWS FLASH February 24, 1999

Those Stock "Giveaways" on the Net Hit the SEC's Radar
The commission says free stock offers have to be registered with it, and that can cost a pretty penny

It was the perfect promotion for attracting restless and opportunistic Internet surfers. Travelzoo, a fledgling travel Web site with little credibility and even less original content, began proffering free shares of itself via a widely distributed E-mail come-on last spring. Within three months, 700,000 Web surfers had filled the rolls, snapping up some 2.6 million shares of "stock" -- really, a promise of stock, with no current value -- in the Bahamian holding company. A flock of imitators have since followed, with their get-rich E-mails zipping to mailboxes around the globe.

It wasn't long, however, until this New Age promotion caught the eye of the U.S. Securities & Exchange Commission. And earlier this month, it issued so-called interpretive letters to two Travelzoo imitators, and American Brewing Co., essentially saying that stock giveaways are now under SEC jurisdiction. The agency reasoned that such offers are not truly "free" to consumers, because the stock promoters reap value from Web users who visit their site and leave behind personal information. This is an "event of sale," according to the SEC, and any company that sells or gives away stock must register it -- or get an exemption from federal and state authorities. This ruling likely covers some of the best-known free-stock offerings, from the likes of and

The SEC guidelines could also prove a financial and logistical roadblock to the best-known such site of them all. That's Travelzoo, the brainchild of Ralph Bartel, a communications PhD and former TV journalist who launched the site from his parents' home in Hamburg, Germany. Legal fees for a federal stock registration can cost between $50,000 and $200,000, according to an SEC spokesman. A patchwork of rules also govern state registrations -- all 50 of which Travelzoo might be required to file, given that the Net reaches every state instantaneously. During the third quarter of 1998, the most recent for which statistics are available, Travelzoo reported unaudited profits of $34,749 on revenues of $103,282.

NOT CARVED IN STONE. The ruling doesn't necessarily mean that Travelzoo will have to register its stock. It can apply for exemptions, which generally allow certain small businesses to raise limited amounts under minimal governmental oversight. That's also a possible out for Jay Lacny, founder of, the fledgling financial-data company that sought the SEC's comments before issuing its free stock, a plan since put on hold. "This is such a new concept that it's going to take some defining and revisions before there's something carved in stone," says San Diego-based Lacny.

Perhaps that's one reason why Bartel says he isn't worried by the SEC regulations. Though the agency did contact him last July, he hasn't heard a word since. What's more, his stock-giveaway ended months ago, and he does not plan to revive it. "As soon as they contact me, I'll contact my legal counsel," he says.

Yet Bartel's wait-and-see atittude may come back to bite him, says Frederick D. Lipman, an attorney at the Philadelphia firm Blank, Rome, Comisky & McCauley and a professor of securities law at the University of Pennsylvania Law School. "The law is the law, and it doesn't make any difference whether someone told you. You're presumed to know the law." As for Bartel's contention that the SEC's interpretive letters apply only to the companies to which they were sent, Lipman warns that such letters are taken "very seriously at the SEC."

SCRAPPY RIVAL. That's supported by the lawyer who wrote them, SEC Special Counsel Michael Hyatte. "I don't know if it's fair to say they [the letters] apply only to these companies," he says, adding: "Other companies that did this didn't ask us. They would have gotten the same answer."

For now, Bartel says he's concentrating on building Travelzoo, currenly based in Palo Alto, Calif., into a niche competitor of such online travel giants as Expedia and Preview Travel. So far, the startup has proved a scrappy rival, making Media Metrix's list of the Top 500 most-visited sites for the last three quarters. And what was once a vapid collection of Web links has been transformed into a modest, but frequently updated compendium of travel information. Last summer, the site even began earning commissions on air travel booked via its screens. During 1998's third quarter, Bartel claims to have sold $602,574 in plane tickets, netting commissions of $103,282.

"I'm confident we can turn this into a successful business," he says. "The share giveaway was a great idea, but this was long ago." That may be true from Bartel's vantage point, but the SEC has a long memory -- even measured by something as fast moving as Internet time.

By Dennis Berman, staff reporter, Business Week Online

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