SECURITIES ACT OF 1933
Release No. 7702 / July 21, 1999
ADMINISTRATIVE PROCEEDING
File No. 3-9936
| In the Matter of WOWAUCTION.COM INC. and |
ORDER INSTITUTING PUBLIC PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933, MAKING FINDINGS AND ISSUING A CEASE-AND-DESIST ORDER |
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") be, and they hereby are, instituted against WowAuction.com Inc. ("WowAuction") and Steven Michael Gaddis, Sr. ("Gaddis"). Accordingly, IT IS HEREBY ORDERED that said proceedings be, and hereby are, instituted.
II.
In anticipation of the institution of these administrative proceedings, respondents Gaddis and WowAuction 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, Gaddis and WowAuction consent to the issuance by the Commission of this Order Instituting Public Proceedings Pursuant to Section 8A of the Securities Act of 1933, 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 Gaddis and WowAuction, the Commission makes the following findings:
A. Respondents
WowAuction is a Georgia corporation and was incorporated on March 4, 1999 by Gaddis. WowAuction owns and operates an Internet auction site which lists a number of different categories of items for sale, including autographs, beanie babies, sports cards, coins, stamps and toys.
Gaddis, age 48, resides in Woodstock, Georgia. Gaddis is the majority owner and president of WowAuction. Gaddis is self-employed as a seller of collectibles including stamps, coins, and beanie babies. Gaddis is responsible for the content on the WowAuction web site. Gaddis personally listed many of the items offered for sale on the WowAuction web site.
B. WowAuction's "Free" Shares of Stock
From at least April 7, 1999, WowAuction represented on its web site that the company would give away "free" stock under two circumstances. First, the WowAuction web site stated that an individual who registered with WowAuction would receive three free shares. Second, the web site stated that a registered user would receive another free share, up to a maximum of seven additional shares, for every person who listed the user as a reference when registering. In addition, WowAuction stated that it would give 10,000 shares of WowAuction stock to five registered users who WowAuction would select in a drawing on September 15, 1999. All registered users would be eligible for the drawing. The WowAuction web site also stated that WowAuction would conduct a direct public offering of stock during the third quarter of 1999.
WowAuction has not registered any of these securities with the Commission, nor has it filed a Form D claiming an exemption from registration. In addition, WowAuction has not registered the securities in any state, nor has it delivered the requisite disclosure documents. Moreover, WowAuction did not limit its "free" stock to only accredited investors.
Gaddis and WowAuction disseminated the "free" stock via the Internet to attract visitors to the web site and to generate interest in WowAuction and WowAuction's planned future public offering.
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. WowAuction and Gaddis benefited from the "free" stock give away because it attracted additional people to the web site. The "free" stock give away also enhanced Gaddis' ability to sell many of his items on the web site. In addition to publicizing the auction site, the "free" stock give away generated interest in the planned direct public offering; such increased interest obviously would benefit WowAuction and Gaddis.
WowAuction 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 WowAuction. Because WowAuction offered the "free" shares over the Internet, WowAuction 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). WowAuction 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.
V.
Based on the foregoing, the Commission finds that Gaddis and WowAuction committed violations of Sections 5(a) and 5(c) of the Securities Act, and that Gaddis caused WowAuction's 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 of 1933, that Steven Michael Gaddis, Sr. and WowAuction.com Inc. cease and desist from committing or causing any violation and any future violation of Sections 5(a) and 5(c) of the Securities Act.
By the Commission.
Jonathan G. Katz
Secretary