SEC Vows Crackdown on Web Stock Gifts

The U.S. Securities and Exchange Commission’s top cop said Monday that the agency may file charges soon against at least one company that offers free stock to people for visiting its Internet site.

“These giveaways are illegal more often than not,” SEC enforcement director Richard H. Walker said in a speech. “You can expect to hear more from us on this topic soon.”

Separately, SEC Chairman Arthur Levitt also will announce next month that the commission is beefing up its enforcement resources to cope with the growing problem of Web-based securities fraud, Walker said. About 135 of the SEC’s 850 enforcement lawyers currently help police Internet fraud.

Several Internet start-ups have been competing for the attention of Web surfers by offering free company shares to anyone who visits their Internet sites. Walker said the problem with many stock giveaways is that “at a minimum, they are no different than an unregistered sale of securities,” which is illegal.

The SEC enforcement director declined to say which companies the commission has been investigating, or when it might bring its first enforcement case in this area. Walker’s comments follow concerns expressed in Congress about stock giveaways, as well as the commission’s own tightening of its regulations in this area.

In February, the SEC provided legal guidance in a letter to Simplystocks.com Inc., a financial information site. The letter, from the SEC’s corporation-finance division, said companies offering free stock must register those shares--just as they would to sell stock--if recipients must provide personal information that can be used for company marketing. Web operators, for example, sell advertising based on the number of visitors--or “eyeballs”--they can attract.

Travelzoo.com, an online travel company that offered free stock last year, was contacted by the SEC last summer, President Ralph Bartel said Monday. He declined to discuss what the commission requested.

“We’ve been complying with applicable federal and state laws,” Bartel said.

One securities lawyer who has represented Internet companies expressed concern that any SEC enforcement cases could quash the creativity of legitimate firms or even force them to shut down.

“The SEC should be careful in bringing an enforcement action in cases where investors really are not at risk,” said Russell Frandsen, a partner at the Radcliff Frandsen & Dongell law firm in Los Angeles. He said investors who receive free stock for visiting a Web site “aren’t putting up money or property.”