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La. asks PayPal to halt service in state

Days after a lawsuit delays its IPO, the online payments company gets more bad news as Louisiana asks the company to cease service until the state licenses it.

Days after a patent suit delayed its planned initial public offering, PayPal had more bad news for potential investors.

In a letter sent last week, Louisiana asked the online payments company to cease offering its service to the state's residents until PayPal receives a license from the state, the company said in a regulatory document filed Monday. Although Louisiana residents account for a small fraction of the money sent through PayPal, the state's move could presage other governmental attempts to regulate PayPal's service.

"We will comply promptly and suspend the ability of Louisiana residents to make payments through our service, but we reserve the right to contest the order through the appropriate administrative process," PayPal said in its regulatory filing.

Also Monday, it appeared that PayPal's initial public offering was back on track. The company is expected to price its shares Thursday and begin trading Friday, according to a representative from Salomon Smith Barney, the lead underwriter of the offering. A PayPal representative declined to comment on the IPO.

PayPal, which allows customers to make and accept online payments, has largely been unregulated since it debuted its service in October 1999. The company has a license to transmit money only in Oregon and West Virginia. Meanwhile, it is applying for similar licenses in 14 other states, including its home state of California.

But PayPal also faces potential challenges from state banking regulators. During the past two years, California and Idaho have questioned whether PayPal is operating an unauthorized bank. Meanwhile, officials in Louisiana and New York have gone a step further and stated their opinion that PayPal is doing just that.

PayPal said that it has already addressed the states' concerns. But the company warned that it could still be subject to hefty fines if it is found to have offered either an illegal banking service or an unlicensed money transmitting service. New York, for instance, could fine the company $5,000 for each day that it finds that PayPal was operating an illegal bank. Louisiana could charge the company $1,000 a day for the same offense.

Payments made by Louisiana residents comprised just 0.9 percent of the amount of money sent through PayPal during the first nine months of 2001.

Wall Street has been anticipating PayPal's IPO because it will be one of the first by an Internet company since the economic downturn. Internet companies and investors have been awaiting a rebound of the IPO market.

Online security firm CertCo sued PayPal last week, and PayPal responded to the suit Monday, charging CertCo with deliberately attempting to delay its IPO.

CertCo representatives did not return calls seeking comment.

PayPal moved to get its IPO back on track Thursday, filing documents with the Securities and Exchange Commission addressing the CertCo suit and another potential patent dispute by Tumbleweed Communications.

PayPal has not changed the terms of the offering, according to the Salomon Smith Barney representative and a regulatory document filed Monday. The online payments company still plans to sell 5.4 million shares for between $12 and $14 a share.

Although the company offers a popular service among online auction users, with some 8.5 million personal accounts, PayPal has never posted a profit. In its most recent quarter, PayPal lost $18.54 million on $40.4 million in revenue.