SEC warns against free-stock offers

They're not just annoying. The free-stock deals being e-mailed around the Net are illegal.

It sounds like a plausible Internet-age moneymaking scheme: a Web startup giving away free stock as a promotional scheme. The user has nothing to lose, and -- who knows? -- the company could end up being the next

There's just one problem: the free-stock offer is illegal.

The Securities and Exchange Commission has recently begun issuing warnings about the innocuous-sounding free-stock deals, which are promoted by e-mails sent from one friend to another.

"A company called Tradehall (very similar to eBay, whose stock has skyrocketed) is giving away free stock as a promotional stunt. (The stock is not yet public.)" read one such e-mail. "They are trying to generate interest in their startup." The message then gives instructions on how to sign up for shares of stock.

Tradehall says the promotional deal has signed up nearly one million members. A site called is also promoting a stock giveaway.

After a user signs up for stock, he is given a referral code; when another person signs up using that referral code, the first person typically gets additional stock.

No-good stocks
The SEC says the technique is out of bounds partly because such offers aren't regulated.

"Generally you can't do offers like this," said SEC spokesman Duncan King. "There are a lot of issues around it, but one of them is that you're creating a market in unregistered securities."

He said that even though the offers are just promotional tools, "if stock is involved, you can't do it."

It would be difficult to think of a better giveaway than Internet stocks, which have achieved a reputation for making billionaires out of twentysomethings, after a persistent rise in shares of companies such as Yahoo! Inc. (Nasdaq:YHOO) and (Nasdaq:AMZN).

Riding the wave
In fact, the e-mails promoting the stock giveaways name such stocks to attract additional interest. A message telling people to get free stock -- which does not appear to have been sent by Popularlink -- stated that "the last company to try this route is now listed on the Nasdaq (Amazon)."

However, flatly denied participating in any such scheme. "It's something we haven't done," said Amazon spokesman Bill Curry, who added that the company had never even contemplated a stock giveaway.

The SEC's King said the Internet allows such too-good-to-be-true offers to find a much wider audience than they would otherwise.

"It's making these things much more possible," King said. "As a medium, the Internet is a cheap, effective way to reach millions of people."

He said that while the SEC does intend to enforce its regulations on free-stock cases, it has never prosecuted such a case in the Internet era.

Popularlink and Tradehall could not be reached for comment.