posted on February 12, 2002 05:43:50 AM new
PayPal Warns About Service Problems
SAN FRANCISCO (AP) -- PayPal Inc. warned Monday that its popular online payment service is about to be shut down in Louisiana by that state's banking regulators, casting another cloud over the company's widely anticipated initial public offering of stock.
The imminent shutdown of PayPal's service in Louisiana was disclosed in Securities and Exchange Commission documents. They detail the risks the Palo Alto-based company faces as it tries to overcome the stock market's distaste for unprofitable Internet companies.
PayPal had hoped to sell 5.4 million shares at $12 to $14 apiece last week, but a patent infringement lawsuit filed by CertCo Inc. threatened to short circuit the company's online payment service. That prompted investment bankers to delay the IPO until this week.
In a counterclaim filed Monday in Delaware, PayPal sought to invalidate CertCo's patent claim and alleged the New York-based company waited until the last minute to file its complaint to disrupt PayPal's IPO.
The delay forced PayPal to disclose several new developments, including word that Louisiana regulators sent a Feb. 7 letter ordering the service to stop brokering payments between online buyers and sellers until the company receives a money transmission license.
Monday's bad news might pressure PayPal to lower its IPO price or pull the offering, said Kyle Huske, an analyst with IPO.com.
"Obviously, you don't want these kinds of negatives to come out in a panicky market like this," Huske said. "It's tough to say what will happen now. It's all going to depend on the fortitude of the investors that they had already lined up for the IPO."
With the latest revisions to its outlook, PayPal now hopes to set the IPO Thursday, paving the way for the company's shares to begin trading Friday on the Nasdaq Stock Exchange.
At the current target price, PayPal's IPO would raise more than $60 million. As of Sept. 30, the company had $138.6 million in the bank and its losses have been steadily diminishing over the past year.
In its SEC filing Monday, PayPal said it will comply with the Louisiana order forcing it to suspend business in that state when management receives the notice. The company also said it may appeal the Louisiana order in an administrative hearing.
PayPal's Louisiana customers accounted for 0.9 percent of the service's payment volume during the first nine months of last year, according to the SEC documents. The company makes its money by collecting a commission based on the dollar amount of most transactions completed on its e-mail service.
Although Louisiana represents a small portion of PayPal's overall business, the company's regulatory problems in that state might not be isolated, management conceded in Monday's filing.
Besides Louisiana, New York also has notified PayPal the company is running an unlicensed banking business. The New York regulators still haven't ordered PayPal to stop doing business there, which accounted for 6.4 percent of the payment volume handled by the company during the first nine months of last year.
PayPal said regulators in nine other states and the District of Columbia have indicated the company needs a license to run its online payment service. Those states are: Arizona, California, Colorado, Idaho, Massachusetts, Maryland, Texas, Virginia and Vermont.
The company said it has already filed, or plans to file, applications in those states and the District of Columbia. Based on management's analysis, the company also has decided to seek money transfer licenses in Connecticut, Minnesota and North Carolina.
PayPal already is licensed in Oregon and West Virginia.
If state regulators determine PayPal has been running an illegal banking business, the company could face substantial fines dating back to when the service began with 24 users in October 1999. The service had ballooned to 12.8 million accountholders as of Dec. 31.
