Licensing Problems Threaten PayPal IPO

PayPal Inc. warned Monday that its popular online payment service is about to be shut down in Louisiana by banking regulators, casting another cloud over the firm’s planned initial public stock offering.

PayPal had hoped to sell 5.4 million shares at $12 to $14 apiece last week, but a patent infringement lawsuit filed by CertCo Inc. threatened to short-circuit the company’s service. That prompted PayPal to delay the IPO until this week.

Now, Louisiana’s claim that PayPal is operating an unlicensed banking business could force the company to lower its IPO price or delay the deal, analysts said. But the firm’s underwriters said they still hope to sell the stock Thursday.

In documents filed Monday with the Securities and Exchange Commission, Palo Alto-based PayPal said Louisiana regulators sent a letter Thursday ordering the service to stop brokering payments between online buyers and sellers until the company receives a money transmission license. In its SEC filing Monday, PayPal said it will comply with the order.

Although Louisiana represents less than 1% of PayPal’s overall business, the company’s regulatory problems in that state might not be isolated, management said. New York also has notified PayPal that the company is running an unlicensed banking business. New York regulators still haven’t ordered PayPal to stop doing business there, which accounts for 6.4% of the payment volume handled by the company.

The company said regulators in nine other states have indicated it needs a license to run its online payment service. PayPal said it already has filed, or plans to file, applications in those states.