Securities regulators reviewing a private placement by

Travelzoo

(TZOO) - Get Report

have asked the company to name its two biggest customers and explain how it will account for payments to stockholders who received shares in a 1998 promotional giveaway.

The requests were among an otherwise routine list of questions sent to the highflying Internet company by an assistant director in the commission's division of corporate finance on Nov. 10. A copy of the letter was obtained by

TheStreet.com

. The company must respond to the seven-page letter by Nov. 26.

SEC officials declined to comment on the letter. A Travelzoo spokesman did not return a telephone call. The company's lawyer had no comment.

Travelzoo sold 750,000 common shares to a group of hedge funds on Sept. 30, raising about $30 million. Before the shares can be resold, SEC rules require they be publicly registered through a filing that is reviewed by the agency. While most of the SEC's questions for Travelzoo related to procedural matters, a few pertained to past disclosures.

Travelzoo said in a 10-Q Monday that two customers make up roughly one-fifth of its revenue. In its questionnaire, the SEC advised the company to identify the customers in future filings and to describe any agreements it has with them, if they are covered in writing.

In past corporate filings, Travelzoo has declined to name the customers, which this year accounted for about one-fifth of the company's $23 million in advertising revenue.

The commission also asked Travelzoo to say how big a role higher advertising rates had in a surge in the company's revenue the past two years. The letter asks the company to "describe the changes and state the effect of the price changes on revenues in quantitative terms."

Regulators were especially curious about the company's handling of some 5 million free shares it distributed in 1998 to 700,000 people who signed up as initial subscribers to its Web site. Earlier this year, Travelzoo's board declared 4.1 million of those free shares invalid because the stockholders had not exchanged them for new shares after a corporate reorganization. It reduced its outstanding share count to 15 million from 19 million.

In October, the board backpedaled, offering cash to former stockholders who can prove they had received free shares and weren't aware of the exchange.

With Travelzoo's stock trading between $85 and $100 a share, the company could face a substantial payout if all the former shareholders came forward with a valid demand. To date, the company has set aside just $220,000 to reimburse its former shareholders.

The SEC has asked the company to account for the program and "address the timing, measurement and classification of amounts you expect to record within your financial statements."

"Explain your reasons for entering into the program and provide us with a timeline of your decision-making process," the letter says. "Address how circumstances surrounding establishment of the program affected your assessment of any potential liabilities prior to Oct. 15, 2004."

Securities lawyers say it's not uncommon for the SEC to send such letters to companies when they are reviewing the registration of shares for sale. The receipt of such a letter is not an indication the SEC is considering bringing any kind of enforcement action.

News of the SEC letter comes at a time that Travelzoo's shares have been on a tear, rising nearly 1,000% for the year to about $85 in midday trading Friday. The stock's astronomical gains have been fueled by a a combination of renewed interest in Internet companies, momentum trading and a float of just 2 million shares that makes the stock prone to immense volatility.