Internet Advertisers Find It Hard to Keep Quiet Before IPOs

Hoover's (HOOV), the online corporate financial information provider, went public last Wednesday in typical Internet IPO fashion. The stock jumped 102% to 28 1/2 before ending up 57.6% at 22 in its debut.

The IPO certainly garnered the company some publicity. But Hoover's was in the investing public's eye in more ways than one. Viewers who tuned into CNBC might have noted that Hoover's is sponsoring CNBC's ticker. The company also began running banner ads on TheStreet.com for the first time ever just six days before the IPO.

That's quite a high profile for a company in its quiet period. The SEC requires companies not to publicize, hype or tout their stocks before going public.

"Coincidentally, these ads occur in places where these investors seem to flock," says Edgar Online Internet analyst Tom Taulli.

More and more, it seems strategically timed ad campaigns are a way for businesses to get the attention of investors. While Internet companies are reluctant to disclose how much they spend on advertising around the time of a public offering, some analysts think the trend is obvious. "You'd be an idiot if you didn't realize that companies pump up their ad budgets during the time they're going public," says Scott Sipprelle of Midtown Research, an IPO research firm in New York City. "These guys are basically prespending their IPO proceeds."

Hoover's is not alone in wanting to increase its exposure before its IPO. Prodigy Communications (PRGY), an Internet service provider, ran ads on CNBC before its February IPO. StarMedia (STRM), the portal site aiming for the Latin American market, took out television spots and plastered ads inside New York subway trains.

A Prodigy official says the company adhered to SEC regulation. Hoover's wouldn't comment on its advertising campaign. StarMedia says it maintained its normal advertising schedule, although the ads are a lot less visible now on television and across subway trains.

"No rules prohibit advertising," says SEC Public Affairs Director Chris Ullman. "The principle is, do not hype the stock to say, 'We're going be the next Microsoft (MSFT).'" So, as long as an advertisement focuses on a company's services but not its stock or IPO, then it's within SEC regulations. Still, a company that steps up advertising before an IPO is entering dicey territory.

"It's a gray area because companies aren't supposed to disseminate any material that's not part of the prospectus," says Midtown Research's Sipprelle. "But at the same time, companies argue securities regulations weren't designed to impede business."

But defining business is getting more difficult. For Web companies that generate business through advertising, finding clear answers is tricky. "The SEC has no problem with doing ordinary course-of-business advertising as long as it's consistent with what you've always done," says Greg Williams, a California securities lawyer whose clients have included GeoCities, a Web community site that was bought by Yahoo! (YHOO) earlier this year.

"The dot-com companies are really media companies, which are about getting in front of people's eyeballs and ears," Williams adds. "So it's hard to distinguish between what they're trying to do to operate and what they're trying to do to create buzz for their stock."

It's all about buzz. But with so many Internet companies going public, saturation advertising perhaps is one way to propel a company's IPO to double or triple in its first day of trading. David Menlow, president of IPO Financial Network in Millburn, N.J., thinks ad blitzes reflect a necessity for Internet companies to find new ways to reach potential investors. "The only way to really rekindle investor interest is through a choreographed and concerted effort to let investors know what they do," he says.

There is growing pressure for the SEC to issue further guidance. "The law was written 60 years ago. But do these restrictions make any sense anymore?" wonders David Bayless, a securities lawyer and former head of the SEC's San Francisco office. "The Internet is a fundamental change, and the law has to reflect those changes." Until then, be prepared for more ads.

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