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Full Disclosure.

Investors who claim to have been blindsided by this spring's meltdown of dot-com stocks often have no legal leg to stand on. As the Wall Street Journal pointed out in April, Internet companies going public regularly provide investors with immense amounts of information about the risks involved, and if they choose to ignore these warnings by failing to carefully read the prospectus, they do so at their own peril.

For example, as the Journal noted, the prospectus for one Internet company that went public in April included 13 pages of cautionary material outlining risk factors, including the sentence, "We have a history of losses and, because we expect our operating expenses to increase in the future, we may never become profitable." Another software company warned investors, in blunt terms, that it could not guarantee investors that it would "ever achieve or maintain significant revenues." Voluminous information of this sort has become the norm, in part because entrepreneurs have recognized that investors, by and large, tend to ignore what is written in the fine print.

Since the Journal article appeared back in April, this phenomenon has actually become more prevalent, as companies going public seem determined to provide investors with boatloads of information about the risks and potential difficulties these companies could encounter in the months and years ahead. The nature of these disclosures, and the colorful language used, strongly support the belief that no one ever reads this material.

For example, in late May, ThePokey.com, a Houston-based company that operates a series of intranets linking several state prisons around the country, included 27 pages of risk factors and caveats in its 45-page IPO filing. The prospectus pointed out that the founder of the company had been killed in a 1998 jailbreak n rural Louisiana and that the firm was desperately low on cash. It concluded with the following words:

"In light of the fact that the board of directors spends so much time at cock fights and trip clubs, and nobody at the company seems to know very much about computers, we cannot guarantee that we will ever generate sufficient revenues to make the venture profitable. But we will all do the best that we can, and we deeply hope that will be enough."

Such direct, graphic language is by no means unusual in recent filings. In June, EMUlate.com, an Australian online ostrich auction, went public after a lengthy quiet period. Its 128-page prospectus included 36 pages of risk factors, which ended with these words: "The fact that we named our company after the emu, a smaller relative of the ostrich, even though we don't actually auction off emus, should give you some indication of what a half-assed outfit we are. We just felt OSTRICHlate.com was not especially catchy, whereas EMUlate.com has that cute little pun working, so we decided to go with it. Look, we drink a lot of beer out here in the bush and we have a lot of fun, but we don't take any of this stuff seriously, and neither should you."

Another noticeable trend in recent prospectuses has been the use of unexpected auditors, with friends and family members sometimes replacing prestigious accounting firms. A case in point is PerpetualGrief.com, a Santa Monica Web site host that sets up electronic pet burials, enabling mourners on the East Coast to attend online pet funerals on the West Coast remotely. The company went public at 123 in June, and is now trading at 5/16, and investors who have been hosed on the stock are now kicking themselves for failing to read the 48 pages of risk factors outlined at the back of the prospectus. Most illuminating was the "Going Concern" letter written by the CEO's mother, Wendy:

"Will Sherman's little company ever make any money?" she wrote at the time. "Your guess is as good as mine. Is Sherman a hard-working man? Absolutely. Is he trustworthy? Honest as the day is long. But this computerized parakeet graveyard of his, would I invest in it? In your dreams! This could end up like his solar-powered bathosphere and his self-poisoning rat and his reusable linguine and all his other crackpot schemes. Sure, I love the little knucklehead, but frankly, I wouldn't lend the guy a nickel."

Clearly, it would behoove investors to spend more time reading the fine print. But is this likely to happen? It's doubtful. In June, an online "entertainment" company called Yxes.tahc, which operates adult-oriented chat rooms for dyslexics, went public in Waterbury, VT. And in the 56 pages of risk factors was a personal note from the founder, Thor Butterfield.

"The company cannot promise that it will ever be profitable, as I recently spent all our cash on beer once I realized what a stupid idea this was. Also, I will probably go out and buy more beer once we go public and my coffers are filled, though at that point, I will probably buy a more expensive brand. Also, I owe my first two wives a lot of money in child support, so if you're waiting around to get your money back, I'd advise going out and buying yourself a Snickers..."

The company went public at 76 and recently was trading at 3 3/4. As Thor Butterfield might put it, "daer ti dna peew."

Joe Queenan is a regular contributor on business issues, corporate culture, and financial follies to Barron's and The Wall Street Journal.
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Author:Queenan, Joe
Publication:Chief Executive (U.S.)
Article Type:Brief Article
Geographic Code:1USA
Date:Jul 1, 2000
Words:909
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