Internet

Will stock giveaway pass SEC muster?

exit23B, a company that plans to launch its shopping site as early as mid-March, is offering to give away 100,000 shares of its pre-IPO stock.

Riding the Internet stock craze, one company is using the lure of free stock to attract users to its Web site.

exit23B, which plans to launch its shopping site for electronics, interactive games, music, and videos as early as mid-March, is offering to give away 100,000 shares of its pre-IPO stock. The stock will be divided among ten winners, whose names will be drawn from those who registered at the site.

And looking to generate foot-traffic to its site, the company notes that entrants who refer other people to the site will be able to submit additional entries.

"The promotion?is an opportunity to build relationships with our customers," Matthew Allen, president of exit23B.com, wrote in an email to CNET News.com. "We wanted to give something of potential significance to the individuals who took the time to visit us."

He added that the company recently met its goal for registrants for the Giveaway, and will discontinue the promotion in the coming days.

"We are comfortable we've reached enough potential customers for the launch," Allen said. "Those people who did sign up will receive only one email when we launch. After we have contacted our registrants, the list will not be considered an asset and they will never again be contacted by exit23B, either directly or indirectly."

Although rumors have circulated in the past that Yahoo gave away free stock as part of a promotion before its IPO, the company never took such action, according to Yahoo spokeswoman Diane Hunt.

Some companies that have sought to give away free stock have been prevented from doing so by the Securities and Exchange Commission, according to one source. Regulators have taken issue with such giveaways in the past because the stock at stake had not been registered with the SEC. Regulators viewed the promotion as an offering, even though the shares were being given away for free, the source said.

But each case is judged on its own merits by the SEC, and it's difficult to say whether exit23B.com will be considered a unique case, the source noted.

Regulators at the Securities and Exchange Commission declined to comment on exit23B's stock giveaway.

Allen, however, said that although the company has not contacted the SEC about the stock giveaway, he believes there will not be any problems.

"We have obtained proper legal advice from a number of professionals. They have all concluded that we are not selling, trading, or requiring any purchase to receive stock," he said. "Our private stock is a company asset, therefore we can give it to whomever we want, so long as we make the proper disclosures to protect the winners."

He added that the company will have rules, regulations, and a question-and-answer area related to the contest posted when the site launches. Registrants must follow the guidelines before they can win, Allen noted.

And what if regulators determine the promotion is not allowable?

"We've been told there won't be any problems. Again, we are not selling or trading the stock. The consumer doesn't need to purchase anything to participate either. We have done our homework," Allen said.

The company has been privately funded and is in the process of holding discussions with venture capital firms.