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Amazon halts stock sale on auction site

Amazon.com shuts down the sale of stock in a software company on its new auction site this week, an incident that could signal a new area of regulation.

Amazon.com shut down an attempt to sell stock in a software company on its new auction site this week, an incident that could signal the need for an entirely new area of federal securities regulation.

Amazon spokesman Bill Curry declined to say whether the online retailer had determined the legal status of the auction, which offered 1,000 shares of privately held software company net.Genesis. But he did say listings that do not comply with federal and state laws are removed from the site.

The incident underscores the difficulty facing online auctions and other e-commerce companies in policing their sites for questionable goods and See special report: 
The high price of auctions services. The net.Genesis episode provides a particularly stinging lesson for Amazon, which only last week launched its auction site with promises of providing a safer alternative to other person-to-person auction operators.

Wall Street regulators are already facing a rising tide of complaints about online stock fraud. Just two days before Amazon stopped the net.Genesis stock sale, Richard Walker, head of the Securities and Exchange Commission's Enforcement Division, said online stock fraud is the agency's greatest challenge.

The introduction of questionable stock transactions on auction sites--fertile ground for legal issues unto themselves--could vastly complicate the federal government's struggle to enforce securities laws online. The net.Genesis auction, for example, raises questions about possible violations of laws restricting the sale of stock sold in private placements.

net.Genesis CEO Larry Bohn characterized the auction as "an unfortunate incident by someone who just didn't know it was a mistake." He said net.Genesis's employee stock option agreements strictly forbid any type of public offering.

Attempts to reach the seller, whose username was listed only as "kkessel7" on the Amazon Auctions site, were unsuccessful.

The offering was listed on Amazon Auctions on April 1. On Tuesday, it appeared in the "Featured Today" section on the front page of the auctions site.

"I am holding a block of net.Genesis stock and am willing to sell some of it in 1,000 increments to raise money to start a new business," the item read in part.

By the time Amazon closed the auction Tuesday, the seller had received six bids for the 1,000 shares, with a high offer of $12,600, or $12.60 per share. The listing referred potential bidders to the net.Genesis site for further information on the company.

net.Genesis spokesman Tom Burke expressed concern that "someone would be artificially creating a value" for net.Genesis stock. Unlike the stock exchanges, he added, "auctions aren't regulated, so anybody can sell anything there."

According to experts in securities law, such an offering could violate the Securities Act of 1933, which regulates public and private stock sales. Under that law, a company must register financial information, forward-looking statements, and risk factors with the SEC before an offering--although exemptions to this rule exist.

The exemptions typically apply to offerings that are limited to a small number of investors or to the state where a business is located, as well as "small issues" that don't exceed a specific amount.

SEC spokesman Duncan King declined to comment on whether the net.Genesis offering met these criteria.

Unlike many investment opportunities that are offered online, net.Genesis is a well-known start-up. Founded in 1994, the maker of e-commerce intelligence software is backed by several top-tier venture capital firms, including Bessemer Venture Partners, OneLiberty Ventures, and Charles River Ventures. Its customer list includes top American companies, including Aetna, Paramount Pictures, and AT&T.

If the sale of net.Genesis's stock wasn't registered with the SEC and didn't have a valid exemption, the auction could have violated the law, according to Joseph Grundfest, a professor at Stanford Law School. The exemptions "usually don't involve a general solicitation," he said. Tens of thousands of visitors potentially could have seen the net.Genesis listing on Amazon's site.

Although the auction involved a relatively small number of shares, "the person selling the stock is running a very big risk," added securities lawyer Jennifer Hagan, a partner at Hagan, Saca & Hagan in Palo Alto, California.

Amazon's major rival, eBay, also prohibits the listing of illegal items and items whose sale violates the law. That does not include expired or canceled stock certificates, many of which have become collector's items.

But the sheer size of person-to-person auction sites represents a significant obstacle to effective enforcement of the law, and forces those sites to take a reactive, rather than proactive, approach to illegal auctions.

"For individual investors, the Internet poses an opportunity for stock to become liquid without going through the disclosure requirements that are at the heart of securities laws," Hagan said.