** BHUB story **
msnbc.com
>>>>>>>>>>>>
How BigHub raised big money
...and avoided Securities and Exchange Commission scrutiny
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
May 18 — A curious document has been making
the rounds on Wall Street in the last couple of
days. Across the top are written the words
“Confidential Placement Memorandum.” But
what the document really amounts to is a
warning of the perils that await investors in
so-called “bulletin board” stocks that trade on
Nasdaq's Over The Counter market.
Will investors get little from BigHub? Share your view
Bighub.Com Inc (the)
(BHUB)
price
change
$15.25
+0.625
Data: Microsoft Investor and S&P
Comstock 20 min.delay
THE PERILS lurk in the fact that virtually no bulletin
board stocks are required to file financial reports with
shareholders or the Securities & Exchange Commission.
And that in turn means that people often have nothing to
base their investment decisions on except rumors and
company-orchestrated press releases that rarely tell the full
story.
Case in point: the secret, though apparently quite legal,
money-raising scheme of a Web-site operator known as
BigHub.com.
Until May 17th, BigHub (at
thebighub.com was known instead as
iSleuth.com, a Web search engine company through which
Web users can, in effect, search the Web by tapping into
many conventional search engines at once.
The company's stock sold for barely $1 a share as
recently as last November. But with the explosion in
Internet stocks, iSleuth.com as well got swept aloft, and by
March was trading for $5 per share. But then in early April,
and for no obvious reason, the company's stock price
began to surge on volume that itself began to grow.
One possible explanation for this now presents itself in
the form of some rapid-fire developments that have
followed the runup. Most of these developments were
eagerly brought to the public's attention by way of
company-issued press releases… but one key development
has been kept shrouded in secrecy… until now.
First, on May 13, with iSleuth's shares having already
doubled from their mid-April level, the company announced
that it was changing its name from iSleuth to BigHub.com
and was launching a new growth strategy designed to make
the site a retail shopping portal.
Shortly after
changing its name
from iSleuth.com to
BigHub.com, the
company began
circulating a
“confidential
placement
memorandum” on
Wall Street to raise
$20 million for the
company.
Then, only days later, the company announced on May
17 that two top officials from Shopping.com — the
California-based Web site that was recently acquired by
Compaq Computer Corp. after having become mired in a
securities fraud scandal involving its underwriter — were
joining BigHub.com's board of directors.
Though the company issued a steady stream of press
releases documenting these and other stock-boosting
developments, it somehow overlooked telling the public
something of obvious interest to every investor.
The vital information? That shortly after changing its
name from iSleuth.com to BigHub.com, the company began
circulating a “confidential placement memorandum” on Wall
Street to raise $20 million for the company.
Investors who had paid as much as $15 per share for
BigHub.com's common stock in the run-up would
doubtless have been shocked to learn that the $20 million
being raised through the offering was, in effect, being raised
directly at their expense.
The gimmick? A highly dilutive rights offering in which
sophisticated investors were being offered a chance to buy
convertible preferred shares that could be quietly held for
30 days, then exchanged for BigHub common stock at $4
per share. Thereafter, as set forth in the offering, the $4
shares would be able to be resold in the open market for
perhaps as much as $15, giving investors a whopping 300
percent return on their money.
For their part,
everyday investors were
set up to stand by in
blithe ignorance that the
deal was even taking
place at all. As a result,
they would not have known that the company's total shares
outstanding were in the process of secretly being doubled,
promising a 50 percent or more dilution in their existing
equity interests — and, possibly, a collapse in the value of
their holdings as well.
SEARCHING FOR DATA
The company's investor relations spokesman, Sanjay
Sabnani, said Tuesday that he knew nothing of the deal and
could offer no explanation as to why the existence of the
offering was not publicly disclosed. He directed further
inquiries to one of BigHub's new board members, Mr. Pat
J. DeMicco, an ex-marketing vice president at
Shopping.com. At press time, DeMicco had not returned
calls.
In reality, the mystery enveloping BigHub.com derives
from the fact that BigHub is a so-called non-filing company.
That is the status of companies that begin life as penny stock
offerings in which shares are sold to the public in amounts
that raise less than $1 million per year. Such offerings are
generally exempt from securities law financial reporting
requirements.
As a result, BigHub.com was under no obligation to
disclose to its stockholders that it was, in effect, setting them
up as bait for a sale of $20 million worth of convertible
preferreds.
And because the convertible preferred offering was
ostensibly being marketed only in units of $1 million-plus —
and thus only to presumably sophisticated investors who
knew what they were doing — that offering as well did not
have to be registered with the SEC.
In other words, for this publicly traded, $65 million
(market cap) company to raise yet another $20 million from
investors, nothing had to be registered with the SEC — not
for the $20 million in the private placement, nor indeed for
the $65 million worth of underlying common shares that
gave the whole deal its appeal.
Nor is it even clear how the company will now use the
resulting proceeds. The offering says only that the money
will be used for “marketing, working capital, and general
corporate purposes.” How things work out in practice
thereafter will be, well, just another one of those multiplying
BigHub unknowns.
Though the offering memorandum says the company
intends to file a registration statement with the SEC within
60 days of the completion of the offering, its credibility on
that score simply isn't very convincing.
In January, the company issued a press release saying it
intended to become a “fully reporting company” with the
SEC following the completion of its annual audit in
February. But it is now mid-May, and according to
Sabnani, the company has so far not done so.
And even if the company does now file an S-1 for the
preferred shareholders, there is no assurance that the
registration will be approved. This could mean that even the
fat cats as well could wind up BigHub stuckholders instead
of stockholders, while the company itself winds up never
having to account adequately for the money at all.
Would you like to get in on the deal anyway? Sorry,
but you're too late. Said Vince Callichia, who has been
fielding calls on the deal at the Wall Street firm of Robb,
Peck and McCooey, “The deal is pretty much closed. I
can't give you any information on it.”
When it comes to Over The Counter bulletin board
stocks, that is always the end of the road where all inquiries
eventually wind up: Sorry, no information available. In other
words, invest at your peril.
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