Joe Loofbourrow, a carpenter, had a moneymaking brainstorm while watching a cable-television show about companies that were giving away stock. Why not use that gimmick to promote his idea for a business that would revive lunar exploration and sink the U.S. and Russian space programs?
Using a personal computer in his two-bedroom home at the edge of Oklahoma City, he peppered popular online message boards with offers for free stock in "American Space Corporation" -- a "pre-IPO" with "100 times the potential" of Wal-Mart, Microsoft and Home Depot. Never mind that there was no company, no headquarters, no staff; Loofbourrow got 200 takers for 10 shares apiece.
"Some of them even agreed to invest in the company," he said. "I was getting 20 calls a day."
Yesterday, the Securities and Exchange Commission called, demanding that Loofbourrow stop his freebie, saying it violated anti-fraud provisions of securities laws. Loofbourrow said he didn't know it was illegal, but he agreed to stop.
"He was not registered to offer stock," said Daniel J. Goldstein, an SEC lawyer in New York. "And it wasn't free. In exchange, he was getting names, e-mail addresses and even other potential investors."
The cease-and-desist order was one of four administrative proceedings launched yesterday by the SEC as part of a crackdown on "free stock" offers made through the Internet after a flood of complaints from disappointed investors. All four companies agreed to stop the practice without admitting any wrongdoing.
In each case, the investor was required to sign up with the issuers' Web sites and disclose personal information to obtain shares. Recipients of free stock also were offered extra shares, in some cases, for soliciting additional investors or linking their own Web sites to those of an issuer. For example, WowAuction.com Inc., an online auctioneer, offered stock to investors who registered with its Web site, the SEC said. And Kinesis International, an unincorporated business, offered shares to people who recruited others. Neither company returned calls for comment.
"Free stock" giveaways have proliferated in the past year, as small Internet companies have fought to draw eyeballs to their Web sites. If a company derives value from the "giveaway," it is required to register with the SEC.
The SEC has warned several companies to stop "giving away" stock. But recently, 19 companies were still at it, according to a count by Stephen Schulte, a New York securities lawyer. "This was a case of message sent and not received," he said. "Now, they're sending their message home."
In the cases brought yesterday, the stock issuers received value by spawning a fledgling public market for their shares, increasing their business, creating publicity, increasing traffic to their Web sites and, in some cases, generating possible interest in projected public offerings, the SEC complaint said.
Web Works Marketing.com Inc., a telecommunications firm, for example, offered shares in exchange for signing up with a long-distance calling plan. The company's site, the SEC said, claimed that the company had 10,000 to 12,000 customers, held a contract with a Virginia-based long-distance service provider and would provide investors with liquidity by conducting a public stock offering. In fact, Web Works, which was run out of a home, had no contract with the long-distance carrier, had only 35 customers and had less than $30 in gross revenue, the SEC said. The company did not return calls.