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Apparently, his counter was on the fritz.
—Marc Geiger, ARTISTdirect
ARTISTDIRECT OVERSTEPS
Securities Violations Plague Online Operation Post-IPO
Just one day after online merch company ARTISTdirect (NASDAQ: ARTD) saw its IPO fall nearly 22% from its opening price, news reports of a pesky regulatory glitch are dimming hopes for a quick rebound. Shares in the company opened at $12 Tuesday (28) and closed down $2.59 to $9.41, then tumbled again today (3/30), closing down 1 at 6 15/16.

In an SEC document filed Monday (3/27), ARTISTdirect ammended its prospectus to say that, due to recent changes in securities regulations, many recipients of ARTISTdirect shares and options prior to the company's IPO may have been ineligible to receive them.

According to the SEC filing, ARTISTdirect's total number of issued shares "did not comply with the requirements of Rule 701 under the Securities Act, or any other available exemptions from the registration requirements of Section 5 of the Securities Act, and may not have qualified for any exemption from qualification under California securities law either." Whoa. They make boo-boo.

Rule 701 limits share and option grants by closely held companies to emplyees, directors, officers, general partners and consultants. Non-public companies are also limited to issuing no more than the greater part of $1 million or 15% of the company's assets.

As a result of the error, ARTISTdirect will be required to make a "rescission offer" 180 days after its IPO, during which it will buy back incorrectly issued stock and options. According to the filing, the company will pay those who return shares or options the full purchase or exercise price plus 10% interest per year from the issue date through the expiration of the rescission offer (about 30 days after it begins). To comply with California law, the company will repurchase unexercised options at 20% of the exercise price multiplied by the number of shares plus the 10% interest.

ARTISTdirect says its ultimate "contingent liability" (that's fancy finance talk for what they might owe) could amount to $27 million, or a little more than half of the $50 million or so generated through its IPO. If no one chooses to sell back their shares, the company will owe nothing. However, due to the wording of SEC rules, eligible shareholders' right to sell shares back to the company under rescission offer may continue indefinitely.

According to the prospectus, the company has earmarked roughly $40.75 million for specific purposes and will set aside the remainder to repurchase shares under the rescission offer, if necessary.

The question now is how many of the artists, managers, and others who received stock and options will opt to sell them back to the company. Given ARTISTdirect's lackluster NASDAQ debut and widespread reports of its regulatory snafu, will the threat of continued negative momentum tempt eligible shareholders to cash in now at a small, yet certain, profit? Well, what do you think?

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