Internet Affords New Opportunity For Securities And Investment Fraud

sec, Feb 10, 2005

Net provides means to raise capital but attracts high-tech scam artists.  When startup microbrewery Spring Street Brewing Co. of New York City made the first public offering of securities on the Internet in 1995, the Securities and Exchange Commission was caught off-guard. The SEC declared the practice illegal, then reversed itself. Today, raising capital through security offerings on the Net is commonplace. 
 
And while the practice is popular with entrepreneurs and investors, it also has attracted high-tech scam artists.

Firms that hawk their stock over the Net must follow the same SEC regulations all other companies that sell their IPOs through conventional means follow.

They must also register with the states where the stock is sold. Since companies selling stock on the Internet reach a national audience, most states have eased this regulatory nightmare by granting exemptions to companies who fail to register their stock if they indicate that they will not do business in a given state or states.

While required to meet a greater regulatory burden than that of small, private stock offerings without a prospectus, most Internet offerings qualify for the SEC small issue exemption Regulation A or the seed money exemption, Rule 504 of Regulation D, which permits public advertising of the offering. Regulation A restricts offerings to $5 million; the limit under 504 is $1 million.

While security trading through conventional means is inherently risky, Internet securities offerings present a new set of challenges to investors and regulators. "Regulatory agencies have less control of who's offering stock," attorney Jeff Letwin, a partner in Downtown law firm Doepken Keevican & Weiss, said.

The Pennsylvania Securities Commission has hired additional personnel to investigate Internet securities fraud and created a Web site which includes sections on Internet scams and a special section on stock touters. The site gives pointers to investors on how to investigate a stock offering and includes links to other states' securities regulators and the SEC's consumer cyber fraud program.

According to Gerald Rutledge, a Downtown lawyer, attorneys are disinterested in pursuing Internet security fraud cases. "Most Internet securities are small capital stock valued at less than a dollar a share. It's not economical to litigate," he said.

The job of thwarting and punishing Internet security defrauders has been left to governmental regulators. Susan Grant of the Washington, D.C.-based National Consumer League said, "We've haven't received complaints about [Internet securities fraud]. People have been reporting it directly to the SEC. They're doing a good job publicizing the issue."