Bye-Bye, Buy.com

And it wasn't necessarily that Buy.com has posted a loss every year it's been in business. After all, the company posted a profit in the fourth quarter of 2004 and was poised to do the same again this year. And its revenue in the first nine months of 2005 grew a modest but respectable 15% while its loss narrowed to $8.5 million from $14 million in the year-ago period.

Most likely, investors balked at Scott Blum -- founder, CEO, chairman and 98.1% stakeholder of Buy.com -- and some of the unorthodox strategies within his little fiefdom. Three years ago, for example, he doled out options for 700,000 shares to his father, a former tech executive, and his mother-in-law, who has been, a filing says, "advising Mr. Blum on the direction of the business [and] providing feedback."

Mother-in-law ... feedback ... Hmm. Nope, too easy. I'm going to pass.

More serious was that when Buy.com filed the initial prospectus for this second public offering, it said that $22.7 million of the proceeds from an IPO would go to repay Blum for loans that a venture firm he controls made to Buy.com, including $3 million in unpaid interest. The company paid $2 million in interest on those loans, suggesting an interest rate in the neighborhood of 10%.

Any CEO can rack up loss after loss at a startup. But it takes a special genius to get paid a double-digit interest rate for it.

But just when it seemed Wall Street wasn't going to bite on that bait, fortune smiled on Blum. Digital River bought a Buy.com subsidiary, Commerce5, for $12.4 million, most of which went toward reducing those loans. By September, Buy.com said it would only use about $5 million of the proceeds to repay Blum. Some $25 million would go toward an aggressive ad campaign, reminding consumers that Buy.com has in fact not disappeared.

Then things really started to get weird. In October, RBC Capital Markets, the lead underwriter on the Buy.com IPO, backed out. Corporate Financing Week reported that RBC disagreed with Blum over the IPO's timing. Thomas Weisel Partners became the top name on the prospectus, with Legg Mason Wood Walker joining the underwriting team. A month later another underwriter, Pacific Crest Securities, also vanished from the filings.

Still, the IPO barreled forward, with an asking price of $45.2 million, or $12 a share. Only now, $9.6 million of that would go to repay Blum's loans. Then Buy.com changed its mind again. On Dec. 14, Buy.com said it wouldn't use any of the proceeds to repay Blum. Two days later, it slashed the price of the IPO itself to $8 a share.

Now the ill-starred IPO is postponed indefinitely. But don't feel too bad for Mr. Blum. He's still collecting interest on those loans.

Get Jim Cramer's picks for 2006.

>To order reprints of this article, click here: Reprints