Wednesday, February 3, 2010

No Such Thing as a Free Lunch (or Free Stock Either)

Recently, I've come across a phenomenon that I thought was long dead and buried -- free stock. That is, start-up companies that are giving away stock in return for a customer signing up for a mailing list or in return for recommending some number of friends.

The deal seems too good to be true -- all you have to do is sign up and you get 10 shares of stock! In 5 years when the company IPOs, you'll be fabulously wealthy. Or something like that.

The problem with this arrangement is that the stock is not really free. While it is true that no one is paying any cash or stroking any checks, there is still an exchange of consideration. You had to do something to get the shares -- they didn't just show up on your doorstep like a lost baby.

Back in the dot com era, this was a popular trick to build buzz for your e-commerce site. (As an aside, I believe I am still technically entitled to 100 shares of Travelzoo.com...)

But, like it does with most securities-related things that seem to good to be true, the SEC shut down these offers of free stock with extreme prejudice in mid-1999. If a person is required to "sign up" and "disclose valuable personal information" in order to receive your stock, they are giving you consideration and you are offering to sell and selling securities. And -- as you probably know -- it is illegal to offer to sell or sell securities unless you have registered them (e.g. in an IPO) or unless you have an exemption from registration. It is highly unlikely that your public offer of free stock to anyone that signs up would be eligible for an exemption.

So folks, let's be safe out there, try not to violate securities laws, and don't give away any "free stock."

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Dividends and Preferences by Hank Heyming is licensed under a Creative Commons Attribution 3.0 United States License.