In space, no one can hear you scream--but you can hear chief executives scream on the Internet.
An internal e-mail message from Wired Ventures Chief Executive Louis Rossetto's--which was quickly posted for the masses on public Internet sites--appeared to offer strong support for the company's forthcoming $293 million stock offering and complained viciously about poor journalism as the main threat to the firm's bid to raise capital. The offering is supposed to be priced this evening. (WWWW:NASD)
This rather spirited support of a firm's offering in a widespread internal memo that rapidly migrates to the Internet raises several sticky questions about the Securities and Exchange Commission's so-called quiet period rule. Securities lawyers said the issue of Internet dissemination, especially dissemination not authorized by the company, raises thorny questions about stock hyping and how to control comments made electronically to a firm's employees.
"When a company is going public, they should avoid anything that has the appearance of conditioning the market or hyping the securities," says John Heine, a spokesman for the SEC, addressing the general rules concerning quiet periods.
The SEC's "quiet period" rule prohibits any public promotion of a stock in registration for an initial public offering. In addition, the quiet period rules compel the company to refer questions about the stock to the prospectus.
But just a week before the planned offering, Rossetto fired off a manifesto promoting Wired's business prospects to employees. Rossetto's memo found its way onto the Internet as mainstream media outlets hammered the money-losing firm's prospects. His ten-paragraph screed slammed the "clueless¿Big Media" accusing the likes of Business Week, MSNBC, the LA Times, and US News & World Report of "shoddy, if not malicious stories" about Wired Ventures.
Wired publicist Taara Edenhoffman confirmed that Rossetto distributed the e-mail to every single employee at Wired Ventures, but insists that Rossetto did not intend it to be leaked for public consumption. Within one day it was posted on a Wired discussion group on the The Well, an Internet discussion group.
"This is a company of great people who make great products," Rossetto wrote, boasting of more than 1300 ad pages this year, third quarter revenue up 100 percent over the second quarter, a new book imprint and a television show based on Wired's Netizen online publication on MSNBC. "It's facts like these which speak louder than clueless reporting¿One thing that we've discovered is that sophisticated investors are pretty immune to bad journalism--and they can read the prospectus."
Of course, the prospectus for Wired's offering had been soundly trashed in the financial press--which likened it to everything from "three card monte" to "an issue of Mad magazine." Wired's first planned offering valued the company at $447 million last year--more than 17 times 1995 revenues. This time out, the company has dropped its valuation to $293 million, with no explanation for the new price. It seems investors either have read the press clippings or are not quite as immune to news stories as Rossetto presumes.
According to the prospectus, which we read despite Rossetto's intimation that financial reporters have failed to do so, says the company has yet to turn a profit, despite $1.5 million per issue in ad revenues. Ad revenues account for 90% of the company's revenues, according to the prospectus. While the company's 1995 revenues were almost three times that of the previous year, that growth virtually stopped dead in the first six months of 1996.
The prospectus also adds as a kicker: "the company expects that operating expenses will increase faster than revenues for at least the next 18 months."
Rossetto closes off his memo saying that "media envy and ignorance are rampant."