KeyOn: Why an Obscure Net Provider's Stock Soared

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His September report on KeyOn says he "has not received, and will not receive compensation for the production of this report," which Noel says is correct because KeyOn only paid for his first report in July. "You don't want to wreck your report by putting a big disclaimer on the front," he says.

Michael W. Mayhew, chairman of Integrity Research Associates, which advises investors on research issues, says such financial transactions are a red flag. "The paid-for-research industry has a stink to it, of being biased, of maybe even being a scam," he says, speaking generally and not specifically about KeyOn. Most sophisticated investors know to be cautious, he says, but the less experienced can be fooled. "Retail investors might think it is an objective piece of research," he says.

KeyOn CEO Snyder says that Noel's analysis of his company has been "pretty even-handed." He adds that, "If [Noel]'s not properly disclosing, I don't think he's doing it maliciously."

Snyder says the rise in KeyOn's shares has much more to do with material improvements at the company than with bullish comments from its supporters. The company eliminated $1.2 million in debt by converting the obligations to stock, and refinanced another $4 million due in June so that the money is now due to be repaid between 2010 and 2015. The company also slashed costs, including executive compensation, to narrow its losses. KeyOn lost $1.5 million during the first six months of this year on revenues of $3.6 million, after a net loss of $7.8 million last year on revenues of $8 million. "We were resilient," says Snyder.

It's almost impossible to know if KeyOn will get broadband money from the government as the cash is handed out in coming months. The company is applying for $95.6 million in loans and $56.3 million in grants, and Snyder argues his chances are good because of the company's experience, technology, and partners. "All applicants are not created equal," he says. The company says it would use the money to build out its wireless network so that it covers as many as 16 states with 6.5 million potential customers.

Yet experts say the odds of success for any company are long. Companies have requested a total of $28 billion for broadband projects, while only $4 billion is being awarded in the current round of applications. "Because of the demand and the competition, there are going to be a lot of disappointed folks out there," says James Lightfoot, head of the Oklahoma City consulting firm ACRS 2000, which advises companies on the application process. "There is not enough money to go around."

For a response to this story from KeyOn's CEO, click here.

Steverman is a reporter for BusinessWeek's Investing channel.

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