San Diego To Jay Lacny, it was a simple plan designed to promote his new financial website and "raise the eyebrows" of his online competitors. The effort succeeded in raising eyebrows, all right. Unfortunately, they belonged to securities regulators rather than rivals. Now things aren't so simple.
Lacny, owner of local Internet-access provider Simply Internet, was looking to create some visibility for his latest site, www.simplystocks.com, an online database where investors can sift through the balance sheets and income and cash-flow statements of thousands of U.S. companies. It's a crowded field, with competitors like Market Guide, Zacks, Media General, and S&P Comstock already up and running. The challenge for the local man was separating himself from the pack.
So Lacny came up with a marketing idea. It was a contest that would use the promise of quick riches, a familiar enough lure on the Internet, to attract visitors to his fledgling site. The prize would be something more coveted than gold in the wired, waning days of the 20th Century: Internet stock, specifically, shares in Lacny's startup. The rules would be simple: Anyone who visited www.simplystocks.com and registered during its first six months of operation would be entered into a drawing. At the end of the six months, five names would be drawn; each would win a 1 percent stake in the company. "This FREE STOCK could be worth a substantial amount of $$$$," Lacny said in an e-mail sent late last month to some potential customers. "Market Guide is our most similar competitor and they offer the same products as us and have a market cap of $56,868,000."
But then regulators learned of the offer, and things have been up in the air ever since. In fact, the only thing that hasn't changed is the hoopla surrounding the deal, most of it generated by Lacny, a 33-year-old Canadian native with no experience as a financial analyst but an obvious penchant for sales.
"The people who are going to get this free stock, or however we cut this deal, are going to have a huge potential to make, you know, a good upside if we can do a tenth of what [Market Guide] is at," says Lacny. "I'm going to blow [Market Guide] out of the water, to tell you the truth. The bottom line is that I am going to proceed with this somehow, some way. We'll find some way to abide by the rules and regulations and still move this forward."
That isn't proving to be very easy. It turned out that Lacny's contest as originally conceived required the blessing of the Securities and Exchange Commission, the Federal Trade Commission, and the attorneys general of all 50 states.
In the beginning, the biggest stumbling block was the SEC, the federal agency that looks out for investors by overseeing the purchase and sale of stocks and bonds. According to the SEC, the Simplystocks.com offer wasn't free at all. In a letter sent to the company in early February, the commission said the contest actually constituted the sale of securities, which meant Lacny would need to register the stock with the feds and disclose a lot of information about his company -- a time-consuming and costly process. The SEC's thinking? By requiring visitors to provide their names, street, and e-mail addresses, and social security and telephone numbers -- personal information that is the coin of the realm on the Internet -- Simplystocks.com was extracting a kind of payment, or, in legal parlance, consideration from them in order to qualify for the drawing.
Michael Hyatte, the SEC attorney who wrote the opinion, goes further. "If what Simplystocks.com is handing out really is stock," Hyatte says, "then the giveaway is, by definition, a sale. The corporation statutes, the statutes in every state under which businesses organize themselves as corporations all provide that a company has the power to issue its common stock only against value. So if Simplystocks.com is saying registration on the site isn't payment, that it doesn't have value, then the answer that is being invited is that what the company is giving in return isn't stock."
Simplystocks.com isn't the first U.S. company -- or even the first U.S. Internet company -- to try to generate interest in itself through a stock promotion like this.
"People are crazy for the idea," the SEC's Hyatte says. Within the past few months, at least two other companies, including a Florida brewer and Texas firm that sells autos over the web, have asked the SEC to allow them to hold similar contests. In both cases, the SEC said no. Lacny, however, seems to be the most persistent, willing to modify the contest -- so much so that its latest incarnation bears little resemblance to the original game -- just so it passes legal muster. "The plan is we are going to proceed with this somehow, some way, in some fashion," he says.
Now, the biggest stumbling block to the promotion's success may be the promotion itself, which, as a result of all the changes, has become so complicated and confusing -- part contest, part chain letter -- that only a regulator could love it.
Gone are the five lucky winners, each getting a 1 percent stake in the company. Instead, Lacny says he will give away the whole 5 percent stake -- or $50,000 cash -- to one winner. But he's not sure yet. "I still haven't made a final decision."
To get the 49 states to sign off on the deal -- "North Carolina's out," Lacny says. "They want to charge me 2000 bucks just to register." -- Simplystocks.com is going to require the winner to pay the company for the stock it awards. Sound confusing? It gets worse. The amount paid will depend on the state the winner lives in and could, Lacny says, "be anything from nothing at all to $25."
Lacny explains the new plan in a letter he is sending to state regulators.
My name is Jay Lacny, President of Simplystocks.com. You may recognize our name from being featured by the Associated Press, Bloomberg, Business Week, etc.