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By Karen E. Klein

Why There's No Such Thing as a Free Share
The SEC says you have to be a registered securities dealer to distribute stock

Q: I have a new Internet company with a rapidly expanding free membership. I would like to give new members shares in my company after they register with me as a way to increase my membership base. But I'm not sure if it's permitted. Can I do it?


A: At this point, the answer is no -- not unless you're a securities dealer or get special permission from regulators. The Office of Chief Counsel at the Securities & Exchange Commission's Corporation Finance Div. has ruled twice on similar questions this year. Both times, SEC Special Counsel Michael Hyatte ruled that the stock giveaway plans would violate the securities law unless a registered securities broker handled the transactions or the SEC granted a registration exemption.

In effect, the SEC ruled that granting stock is an "event of sale," even if no purchase is required. "Our position is that there is no free lunch. People can't just [issue stock] without being registered as brokers or applying for exemptions," says SEC Public Affairs Officer Carol Patterson.

The cases that came before the SEC involved a brewery, which wanted to give away shares of nonvoting common stock with each six-pack of beer it sold, and a Web site, which planned to offer three free shares of common stock to the first 1 million people who signed up for them. In January, the SEC rejected the brewery's request, citing a clause in the Securities Act that states: "Any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing, shall be conclusively presumed to constitute a part of the subject of such purchase and to have been offered and sold for value." In June, the division ruled against the Internet company, stating only that: "...the issuance of securities in consideration of a person's registration with the issuer, whether or not through the issuer's Internet site, would be an event of sale..."

For more information on securities rules, visit the SEC's Web site,, or call its Office of Investor Education at (202) 942-7040. The Web page has specific resources for small businesses. Another resource you may want to check is the National Association of Securities Dealers,

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