Web Works Marketing.com, Inc. and Trace D. Cornell

SECURITIES ACT OF 1933
Release No. 7703 / July 21, 1999

SECURITIES EXCHANGE ACT OF 1934
Release No. 41632 / July 21, 1999

ADMINISTRATIVE PROCEEDING
File No. 3-9937

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") be, and they hereby are, instituted against Web Works Marketing.com, Inc. ("Web Works") and Trace D. Cornell ("Cornell"). Accordingly, IT IS HEREBY ORDERED that said proceedings be, and hereby are, instituted.

II.

In anticipation of the institution of these administrative proceedings, respondents Web Works and Cornell have submitted Offers of Settlement ("Offers"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings herein, except that they admit the jurisdiction of the Commission over them and over the subject matter of these proceedings, Web Works and Cornell consent to the issuance by the Commission of this Order Instituting Public Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Issuing a Cease-and-Desist Order (the "Order").

III.

On the basis of this Order and of the Offers of Settlement of Web Works and Cornell, the Commission makes the following findings:

A. RESPONDENTS

Web Works Marketing.com, Inc. is a Nevada corporation and was incorporated on November 10, 1998 by Cornell. Web Works operates out of Cornell's home in Rush, New York and markets residential and business long distance telephone service through a web site on the Internet.

Trace D. Cornell, age 32, is the majority owner, sole officer and sole director of Web Works. Cornell sold long distance telephone services for a long distance service provider in Phoenix, Arizona from September 1997 to September 1998. Cornell is currently self-employed. Cornell was, at all times, responsible for the content on the Web Works web site.

B. Web Works's "Free" Shares of Stock

In late January 1999, Web Works initiated an Internet web site in which it stated that the company's mission was "to provide extraordinary residential and business long distance telephone service" and "to give the opportunity to own stock in our rapidly growing company." Web Works represented on its web site that the company would disseminate "free" stock to individuals under the following circumstances: (1) an individual who registered with Web Works would receive three free shares; (2) a registered individual would receive another free share, up to a maximum of ten additional shares, for every person who listed the registered individual as a reference when registering; (3) an individual who subscribed to long distance telephone service offered by Telco Communications Group, Inc. ("Telco") would receive 25 shares of stock; and (4) the individual would receive an additional 25 shares of stock if he remained a customer of Telco for six months. Web Works stated that it would disseminate up to 400,000 shares in the "free" stock offering. Web Works removed the free stock offering from its web site in early May 1999.

Web Works has not registered any of these securities with the Commission, nor has it filed a Form D claiming an exemption from registration. In addition, Web Works has not registered the securities in any state, nor has it delivered the requisite disclosure documents. Moreover, Web Works did not limit its "free" stock to only accredited investors.

Cornell and Web Works disseminated the "free" stock via the Internet to induce customers to enter into and maintain contracts for long distance telephone service marketed by Web Works. Additionally, they disseminated the "free" stock to attract visitors to the web site and to generate interest in Web Works. The Web Works web site explained that "high site traffic (number of hits) [was] essential to have a successful web site. . . . When you tell others about the site, you create value for the company. That is exactly why we are offering the shares as a gift."

C. Misrepresentations and Omissions of Material Fact

The Web Works home page described Web Works as the "Internet's Fastest Growing Company." Another section of the web site stated that "we feel that Web Works . . . will grow to become one of the great Internet based businesses of all time." In several other places on the Web Works web site, Web Works was described as a "rapidly growing business." The home page also included a graph which indicated that Web Works had approximately 10,000-12,000 satisfied customers.

There was no basis in fact for these statements. As of early May 1999, Web Works had only 35 customers and the company had only received $26 in gross revenues. The statements that Web Works was "the Internet's fastest growing company" was no more than a "slogan" that was intended to "build excitement" but which was not factually accurate.

The Web Works web site stated that "each share [of Web Works stock] should be worth approximately $38.40 based on a complex equation that I don't expect you to understand at this point." Web Works compared itself to successful Internet companies stating that "the most popular Internet businesses are worth close to $1,000,000,000 or more and the stock in these companies can be worth upwards of one hundred dollars per share." In another statement on the web site, Web Works stated that "if our stock performs like Yahoo or Amazon.com . . . your shares may become worth over $200.00 each."

There was no reasonable factual basis for this stock valuation or price projection. The $38.40 value was based on the assumption that the company would receive annual revenues of $3,840,000 derived from long distance telephone charges for 100,000 customers. As noted, Web Works at the time had only 35 customers and had received total revenues of $26. Similarly, the comparison between Web Works and highly successful Internet companies such as Yahoo! or Amazon.com was without a reasonable factual basis.

Additionally, the web site included a number of statements indicating that Web Works intended to go public. For example, the web site advised individuals to "[h]old on to the shares until we go public" and stated that "[o]nce Web Works Marketing goes public (which could be fairly soon), you can sell your shares or buy more . . ." However, Web Works and Cornell had made no efforts or taken any steps to take the company public other than the offer and sale of "free" stock described herein.

The web site also stated that Web Works "has signed an agreement with Telco Communications Group to provide you with a long distance program." In fact, Web Works did not have an agreement, signed or oral, with Telco.

IV.

Section 5(a) of the Securities Act prohibits the sale of securities or the delivery of securities after a sale through jurisdictional means unless a registration statement is in effect as to such securities. Section 5(c) of the Securities Act, in part, prohibits the use of jurisdictional means to offer to sell securities unless a registration statement has been filed.

Section 2(a)(3) of the Securities Act defines "sale" or "sell" to "include every contract of sale or disposition of a security or interest in a security for value." The lack of monetary consideration for the shares does not mean that there was not a sale or offer for sale for purposes of Section 5. See, e.g., Capital General Corporation, 54 SEC Docket 1714, 1728-29 (July 23, 1993) (Capital General's "gifting" of securities constituted a sale because it was a disposition for value, the "value" arising "by virtue of the creation of a public market for the issuer's securities.") See also SEC v. Harwyn Industries Corp., 326 F. Supp. 943 (S.D.N.Y. 1971). Thus, a gift of stock is a "sale" within the meaning of the Securities Act when the purpose of the "gift" is to advance the donor's economic objectives rather than to make a gift for simple reasons of generosity. Web Works and Cornell benefited from the "free" stock give away because it attracted additional people to the web site. Additionally, the "free" stock give away generated interest in Web Works and any future public offering; such increased interest obviously would benefit Web Works and Cornell.

Section 2(a)(3) also provides that "[a]ny security given or delivered with, or as a bonus on account of, any purchase of . . . any other thing, shall be conclusively presumed to constitute a part of the subject of such purchase and to have been offered and sold for value." Web Works' giving away shares of stock to persons who subscribed to Telco's telephone service clearly constituted the offer and sale of securities.

Web Works made use of the jurisdictional means for the offer and sale of these securities because the "free" shares are being offered over the Internet, an instrument of interstate commerce. American Library Ass'n v. Pataki, 969 F. Supp. 160, 173 (S.D.N.Y. 1997).

There is no exemption from the registration requirements of Section 5 available to Web Works. Because Web Works offered the "free" shares over the Internet, Web Works engaged in a general solicitation and Section 4(2) and the exemptions under Rule 505 and 506 of Regulation D are inapplicable. Rule 504 exempts certain offerings that do not exceed an aggregate annual amount of $1 million and, until recently, permitted general solicitation and advertising. Effective April 7, 1999, the Commission amended Rule 504 to limit the circumstances where general solicitation is permitted to transactions (1) registered under state law requiring public filing and delivery of a disclosure document to investors before sale, or (2) exempted under state law permitting general solicitation and advertising so long as sales are made only to accredited investors. Rule 504(b)(1) of Regulation D; see Securities Act Release No. 7644 (February 25, 1999). Web Works has not satisfied either of these criteria. It offered and sold securities nationwide over the Internet without making any of the requisite state filings or disclosures. Moreover, it did not limit sales to accredited investors.

Accordingly, respondents' offer and sale of "free" stock violates Sections 5(a) and 5(c) of the Securities Act.

Section 17(a) of the Securities Act, which proscribes fraudulent conduct in the offer or sale of securities, and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, which proscribe fraudulent conduct in connection with the purchase or sale of securities, essentially prohibit the same type of conduct. See United States v. Naftalin, 441 U.S. 768, 773 n.4 (1979). Among other prohibitions, these sections make it unlawful to (a) employ any device, scheme, or artifice to defraud, or (b) make any untrue statement of material fact or to omit to state material facts in the offer, purchase, or sale of securities. To prove violations of Section 17(a)(1) and Section 10(b), the Commission must show that a defendant acted with scienter, Aaron v. SEC, 446 U.S. 680, 691 (1980), and that any misrepresen-tations or omissions were material. Basic, Inc. v. Levinson, 485 U.S. 224, 238 (1988); TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976). Knowing misconduct or severe recklessness is sufficient to establish scienter. SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. 1982).

The Web Works web site contained a number of misrepresentations and omissions of material facts concerning the size and growth of the company, the present and future value of Web Works stock, and Web Works's contractual relationship with Telco. Cornell was responsible for the content on the web site and knew that each of these statements was without a factual basis.

V.

Based on the foregoing, the Commission finds that Web Works and Cornell committed violations of Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and that Cornell caused Web Works' violations.

VI.

In view of the foregoing, the Commission deems it appropriate to accept the Respondents' Offers of Settlement.

ACCORDINGLY, IT IS ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that Web Works Marketing.com, Inc.. and Trace D. Cornell cease and desist from committing or causing any violation and any future violation of Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

By the Commission.

Jonathan G. Katz

Secretary