Brewery Stops Trading of Its Shares on Internet

At the behest of securities regulators, a small New York brewer has suspended a path-breaking experiment: trading of the company’s stock on the Internet.

Spring Street Brewing Co. last Friday launched an electronic bulletin board trading system on its World Wide Web page that allowed buyers and sellers to meet and sell its stock. Chief Executive Andrew D. Klein, a former securities lawyer, said he was unaware of any other company with such a trading system.

But after a conference call with 11 lawyers from the Securities and Exchange Commission, Klein agreed to suspend the trading system until the agency researches numerous legal issues, including possible violations of the 1934 Securities Exchange Act.

“They had a lot of questions, and they asked us to stop trading on the Internet for the time being,” said Klein, 36, the brewery’s founder.

Regulators questioned the legality of the unregistered company’s listing and clearing trades in its stock on the Internet and suggested that the firm find an outside broker to act as an agent in its stock trading.

“Their opinion was that this might be kind of a dangerous thing for investors and that it was too open to manipulation,” Klein said.

Securities lawyers agreed.

“I think they’re drinking too much of their product,” said David Robbins, securities law attorney with Kaufmann, Feiner, Yamin, Gildin & Robbins in New York. “There’s no way to regulate it or ensure that investors are getting a fair price or that the market isn’t being manipulated.”

Spring Street Brewing makes Belgian-style beer under the label Wit Beer. Its program was the first effort by a company to create a marketplace for its stock on the Internet. The company processed the buy and sell orders, clearing checks from buyers, sending checks to sellers and then issuing stock to the buyers.

“Although the SEC never says it’s giving advice, their advice to me after two phone conversations was to outsource the broker-dealer functions or become a broker-dealer,” Klein said.

Broker-dealers, who must be registered with federal regulators, agree to clear stock trades, guaranteeing both sides of the agreement to facilitate stock trading.

The SEC declined to comment on the firm or its stock trading.

This is not the first time that Spring Street has pushed the boundaries of securities law through use of the Internet. In February 1995, it had an initial public offering to 3,500 investors that raised $1.6 million.

The stock was registered through normal channels with the SEC and 22 states, but there was a twist: Investors could review the stock offering documents on Spring Street’s Web page and place an order for the shares in cyberspace. To actually complete the transaction, however, investors had to send by normal mail a check and a signed agreement to buy the shares.

In that stock offering, investors were told the shares would not be listed on a regular stock exchange, meaning they would be difficult to sell. Klein said the company intended to eventually list its shares on a stock exchange but that in the meantime it would try to match buyers and sellers through various means.

Spring Street reported a net loss of $511,102 for the fiscal year ended Sept. 30, 1995, compounding losses of $487,969 for the year ended Sept. 30, 1994, according to company financial statements posted on its World Wide Web home page.

Klein said the company has not decided whether to register as a broker-dealer, find an outside company to clear its stock trades, or permanently halt trading in the shares over the Internet.

The firm’s home page is accessible through the World Wide Web at https://www.interport.net/witbeer