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Legal Concerns Reportedly Snag Idealab IPO Plan

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TIMES STAFF WRITER

A 60-year-old federal securities law is making it difficult for Idealab, the Internet incubator that has helped finance start-ups such as EToys Inc. and Ticketmaster Online-City Search Inc., to put together its own initial public offering, sources familiar with the deal said.

The IPO, which some expected to be filed with the Securities and Exchange Commission earlier this year, is taking longer to prepare because of concerns about a law that could force Idealab to be classified as a mutual fund or investment firm, sources said. Idealab’s lawyers are reportedly applying to the SEC for a special exemption to the law.

An Idealab spokeswoman had no comment. The firm is in the so-called quiet period imposed by the SEC before and after a stock offering.

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The 4-year-old Pasadena incubator, founded by entrepreneur Bill Gross, hopes to capitalize on the public’s growing appetite for shares in businesses that finance and own stakes ranging from minority to controlling interests in an array of Internet companies.

One such firm, Andover, Mass.-based CMGI Inc., saw its stock surge tenfold last year. The Internet conglomerate now has a market value of $29 billion.

Sources said Idealab’s IPO might be sold in the second half of the year, depending on when the firm files.

Idealab provides seed capital for companies, as well as advice on subjects ranging from finding management talent to renting office space. Investors include director Steven Spielberg.

“We are hearing that they are having some trouble,” said Tom Taulli, an Internet analyst with Internet.com, a data firm in Westport, Conn. “They have some issues that are causing delays and making some attorneys very rich.”

The “trouble” stems from the Investment Company Act of 1940. Under this arcane federal securities law, a company is considered an “investment company” or “mutual fund” if its investments in companies that it does not control represent 40% or more of its total assets, excluding cash and government securities--a threshold Idealab may currently exceed. Such companies face strict SEC disclosure rules and increased shareholder rights.

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There are a variety of exemptions, said Kathryn Sanders, a Los Angeles attorney who specializes in the 1940s act. “But this is typically a lengthy, complicated process--it can take months and months to get one,” Sanders said.

If it can’t get an exemption, Idealab might be forced to alter its mix of holdings by selling some stakes and acquiring others.

But sources said it’s more likely that Idealab will follow in the footsteps of Wayne, Pa.-based Internet Capital Group, a publicly traded incubator that was granted an exemption in the summer of 1999 by the SEC before its IPO.

“ICG is spawning a great number of copycats,” said Marco Adelfio, a partner with law firm Morrison & Foerster in Washington.

ICG argued that it was a controlling investor in the companies in its portfolio and that its primary business was actively managing and operating those firms, as opposed to being a passive investor such as a traditional investment firm, Adelfio said. Some analysts expect Idealab, whose offering is expected to be lead-managed by Goldman, Sachs & Co., to try the same strategy.

Meanwhile, Idealab today is expected to unveil the first company formed in its Silicon Valley satellite office, a firm called PayMe.com that plans to operate a free personal payment and billing service.

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Times staff writer Karen Kaplan contributed to this report.

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