August 5, 2004 11:16 AM PDT

Google may have issued shares illegally

Google may have run afoul of securities laws when it doled out millions of shares to employees and consultants over the past three years, according to a document filed Wednesday with the Securities and Exchange Commission.

The Mountain View, Calif., company, which is preparing for a hotly anticipated public offering, said it is offering to rescind more than 28 million shares because it failed to register them under federal and state securities laws, according to an amendment to the company's IPO prospectus.

The filing adds details to a recision offer Google outlined in an amended prospectus dated April 29.

Google offered to purchase more than 23 million shares sold to 1,105 employees and another 5.6 million stock options held by 301 people, according to the filing. The affected shares and options were issued between September 2001 and June 2004, at exercise prices ranging from 30 cents to $80 per share.

"These option grants and stock issuances may have violated the Securities Act of 1933 and the state securities laws" of 18 states, including Arkansas, California and Colorado, as well as the District of Columbia, according to the filing.

Securities attorneys and investment bankers said it's not uncommon for a company to forgo registering its shares before filing its initial IPO documents, otherwise known as an S-1 filing. But the number of unregistered shares involved sets Google apart from the others, said one attorney.

"This happens all the time, but not at this magnitude," said Michael Rennock, partner at Morrison Foerster, who specializes in securities law. "Most companies have equity compensation plans where they can issue shares or options, but it appears Google far exceeded those limits of issuing shares to employees without registering them."

By rescinding the shares, Google seeks to address the legal concerns surrounding their issuance. The company is offering to buy back shares at their "strike price," or issuance price, plus interest. It is also offering to purchase the options for 20 percent of their value. One 5 percent shareholder of the company has declined to accept the offer, according to the filing.

Google said it will pay for the stock and option purchases with its cash reserves. As of June, the company had about $550 million in the bank. The buyback offer is valid through September of this year, according to the amendment.

A Google representative could not be immediately reached for comment.

Google, which filed to go public in late March, is expected to raise as much as $3.3 billion in one of the largest-ever IPOs. In recent weeks, the company set the price range for its shares between $108 and $135 a share, of which it plans to sell 24.6 million. The company will trade its shares on Nasdaq under the ticker "GOOG."

The company recently began allowing people to register to buy shares for its offering at the Google Web site, ipo.google.com.

In the end, those holding the unregistered shares will likely face little problems with the stock. That's because the price they paid to acquire the unregistered options will likely be less than the value of Google's IPO shares, and the stock may be registered.

"Where there would really be an issue and where people would be upset is if they paid more for the restricted stock and the IPO price was a lot less," Rennock said. "Here, that may not be the case, so, for the holders, no harm, no foul."

CNET News.com's Dawn Kawamoto contributed to this story.

 

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