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Chapter 2 - The Beauty Contest, February 1999 - Episode 4

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RR Donnelly, the world's largest financial printer, has a squat rectangle of a building with no architectural pretensions a block north of the North Tower of the World Trade Center. The third floor of the building has conference rooms reserved for companies preparing financial documents. There used to be just a couple of these, but the explosion of IPOs has led to the whole floor being converted to accommodate teams of bankers, lawyers, accountants, and company executives furiously producing the documents required by the Securities and Exchange Commission of companies making public offerings.

Even with the expansion, it looked for a while as if the hackoff.com IPO might be delayed by lack of an available conference room at Donnelly. Both Harvey Maklin of Barcourt & Brotherson and Board Member Franklin Adams take full credit for having used their clout to obtain a room.

A torn sign on the door says "hackof".

Larry and Donna are in the hackoff room today, though they haven't been there for most of the process. The hope is that all outstanding editorial issues can be resolved before 5:30 PM so that Donnelly can be told to "push the button." When Donnelly does this, the draft prospectus will be transmitted electronically to the SEC and entered into the SEC's EDGAR database. A recent innovation has made EDGAR accessible to anyone with a Web browser (also a recent innovation). So, once Donnelly pushes the button, all the information in the prospectus will become public.

Besides Larry and Donna, hackoff's chief counsel Aaron Smyth is there. There are two lawyers each from hackoff's outside law firm, Barcourt's outside law firm, and FCBC's outside firm. hackoff's auditors have sent three accountants. Barcourt has four bankers with various jobs and two admins who keep coffee, Snapple, and health food drinks flowing and sometimes clean up debris. They make a lot of copies, too. The junior of hackoff's outside attorneys is an expert with Microsoft Word and keeps up with revisions as they're made. FCBC has two bankers present; Web & Stinger has one, although she has not been there for the whole process.

There are a fluctuating number of people from Donnelley. A couple of them are experts at converting text from the Microsoft Word master to the proprietary Donnelley software that will be used to send to the SEC and typeset the printed versions of the prospectus.

There is a huge table in the middle of the room. Most of the editing and most of the meetings, arguments, and redrafting happen here. There are a couple of tables around the edge which mainly serve to hold used Styrofoam cups and Snapple bottles but also sometimes have papers piled on them. There are inevitably some Krispy Kreme crumbs. The donuts themselves are long gone. Krispy Kreme is also doing an IPO.

The room has a couple of recessed windows on the west side, its only outside wall. These are usually occupied by people trying to get better cell phone reception.

"So this is the draft where we should say whatever the fuck we want to say," says Larry. "Investors get to read this one before the SEC tells us what we are and aren't allowed to say."

"That's very dangerous," says Aaron Smyth. "The SEC can hold us up for as long as they want in review. If they think we're playing games with them, they'll do just that. Also, if we have to make big changes, people might notice. The change process is public too. Besides, Larry, I keep telling you -- no one reads these things. At least not investors. Maybe the guys at the funds look at them when you're doing the roadshow, but they don't see this version."

"Our customers'll read it," says Larry. "Antihack'll read it. The SEC doesn't want me to tell our customers why we're good but DOES want me to tell antihack where we're weak and much too much about our business."

"That's the price of being a public company, Lar, get used to it," Donna joins in. "You sure you wanna do this?"

"Yeah." Larry doesn't hesitate.

"Good," says Donna so only Larry can hear. "If you didn't I might have to kill you."

On the front page of the online document is a warning label:


The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted.


This warning label is not removed until the SEC staff has given its final approval to the FORM of the document, thereby making it "effective". The company cannot begin its roadshow -- the process of pitching the company's stock to large prospective investors -- until everything in the prospectus other than the final price of the stock (and all the numbers that depend on it) has been approved by the SEC. Even when that approval is granted, the prospectus will say: "Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense."

It's sort of caveat emptor. The SEC makes sure that the prospectus is in the proper form; it will diligently protect the public from malformed prospectuses, but it's not their job to make sure that any of the statements or numbers in the prospectus are accurate.

Plaintiff lawyers, a species of attorney that specializes in class action lawsuits against public companies "on behalf of" investors, will tell you that THEY are responsible for protecting the investing public. In early 1999 the investing public doesn't perceive it needs to be protected. All the investors seem to want is a chance to get in on the next IPO. And why not? With minor fluctuations and a few easily explained exceptions, stocks go nowhere but up. "That may be true," Aaron Smyth is telling Larry. "It is certainly true that investors aren't going to read the prospectus. But the plaintiff's lawyers are licking their lips. They may be the only people in the world who DO read prospectuses."

"So what?" asks Larry. "If the investors aren't going to read the fucking prospectus anyway, why are we larding it with eight pages of risk factors, most of which aren't even risks? Why do we tell them six times as much about what can go wrong as about how we're going to make money for them? Maybe they don't read it because it's full of all the bullshit they DON'T want to know and doesn't say word one about what they DO want to know."

"The risk factors are your insurance policy," explains Aaron. "If you put something in a risk factor, you can still be sued, but you won't be sued SUCCESSFULLY. You told them even if they didn't read it. When things do go wrong, the plaintiff lawyers are going to pore over this. And if the thing that went wrong wasn't a risk factor and there was any conceivable way management could've known about it, break out the champagne for them. The only question then is how much do we settle for. Look, Larry, it doesn't cost us anything except paper and ink to put these in. My best advice: Don't look for risk factors to take out; think of risk factors that we haven't put in. They're your insurance policy."

"Okay," says Larry. "I get it. I'll look at them as 'insurance' -- by the way, I never buy any. I don't even take insurance in Las Vegas when the dealer has an ace showing."

"Why am I not surprised?" says Aaron.

Larry reads, muttering to himself.



You should carefully consider the following factors as well as the other information in this prospectus before deciding to invest in shares of our common stock.

As a company with a limited operating history in a new and rapidly changing industry, it is difficult to predict our future growth and operating results.

Our limited operating history makes predicting our future growth and operating results difficult.

Before investing, you should consider the risks and uncertainties that an early stage company like ours will face in the new and rapidly evolving market for Internet security services. Before investing, consider that we have not proven that we can:

. increase awareness of our brand and continue to build customer loyalty;

. maintain our current, and develop new relationships with our customers;

. manage the portfolio of equity we have received instead of cash payments from our customers;

. respond effectively to competitive pressures; and

. continue to develop and upgrade our software and technology.

If we cannot accomplish these goals, our business may not succeed.

We have not been profitable and expect future losses.

To date, we have not been profitable. We may never be profitable or, if we become profitable, we may be unable to sustain profitability. We have incurred significant losses since inception.

The growth of our business depends upon the growth of the Internet, which may not continue.

The growth of our business depends on continued growth in the use of the Internet generally and on the growth in the use of the Internet for commerce. Growth of the Internet may be inhibited by a number of factors, such as:

. quality of infrastructure;

. security concerns;

. technological failures, such as viruses;

. the appearance of a more attractive technical alternative;

. inconsistent quality of service; and

. lack of availability of cost-effective, high-speed service.

Even if Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth or its performance or reliability may decline.

Growth of the use of the Internet for commerce may be inhibited by a number of factors, such as:

. effective competition from traditional retailers;

. unreliable fulfillment of orders; and

. a perception that use of credit cards on the Internet is not safe.


"That hits sort of close to home," says Larry, "seeing that I did the Gotcha attack. Why don't we just say that people might think our CEO is a credit card crook. That's a risk factor."

"Now you're thinking," says Aaron, "I'll draft it."

"Fuck you."

"No, I'm serious. That's a good idea. Won't say crook, of course. But that's the right way to think."

"Okay. Okay," says Larry. "I can't read this anymore. I'm just going to do the headlines."


We are growing rapidly, and effectively managing our growth may be difficult.

Our software may not be able to handle increased volumes which could hurt our reputation and result in a loss of customers.

Failure to attract and retain customers will harm our business.

Our quarterly operating results may fluctuate and could fall below expectations of investors and industry analysts, resulting in a decline in our stock price.

The lack of compatibility in e-commerce servers produced by different vendors makes it difficult to test our software in every possible environment.

Competition could reduce our revenue.

We may need additional capital in the future and it may not be available on acceptable terms or at all, which could force us to curtail or cease our operations.

Our proprietary rights may be difficult to protect.

Acquisitions may disrupt our business and divert the attention of our management.

Year 2000 compliance efforts and uncorrected errors could interrupt our business and subject us to claims.


"This Y2K stuff is real bullshit," says Larry. "I know a guy who made millions, hundreds of millions, from it. And nothing is really going to happen."

"I think we took him public," says one of the Barcourt bankers.

"No, Lehman took him out," says Larry. "You guys blew that one. Must've taken out one of his competitors. Still a lot of bullshit."

"How do you know?" asks a banker.

"Look, it's 1999," explain Larry. "There's all kinds of software running now that is adding a year to current dates and getting a date next year in the next century. If there were going to be a problem at the end of the year, there'd be big problems now. And there aren't. Unless they're all being covered up. New software's not affected, not because programmers are so smart now but because dates are handled in binary and just translated for display. Nothing special about 1/1/2000 in binary; it's just another day."

"There's certainly a perception of a problem," says one of the auditors. "We have a whole department doing Y2K compliance for our customers."

"That's not a problem" says Larry. "That's an opportunity. Maybe hackoff needs a Y2K product."

"I know a guy," says one of the lawyers, "is inviting his cardiologist to his New Year's Party. The guy told him the software in his pacemaker wouldn't have any problem at midnight but he said he'd feel better if his cardiologist is there just in case."

"Gentlemen, I hate to interrupt, but we've got to get through the final read and get this down to the SEC by 5:30," says the senior banker on the team.

"Donnelly's got someone else scheduled in the room for tomorrow and we want to start the clock ticking. Sorry to break up the fun."

At 5:28 Donnelly is instructed to push the button and does. Within a few minutes, the document has been transmitted in its "EDGARized" form. In half an hour, the text is available on the World Wide Web. In a matter of minutes, some potential investors are reading it, despite the warnings that it's preliminary, not guaranteed to be accurate, and not approved in form or substance by the SEC. All skip the risk factors.

Beer and wine are brought into the room at Donnelly to celebrate. The tallest of the supporting admins, a thin, shapely girl, lets down a startling profusion of reddish-brown hair from what had been a small bun. The accountants retrieve their suit jackets from the chair backs and put them on. The lawyers, on the other hand, loosen their ties.

"Do you know why they call the prospectus a 'red herring'?" Aaron asks Donna. "I always though it was because of the red ink on the cover that says its preliminary," she says.

"No," says Aaron proudly. "A red herring is something you drag across a trail to put the bloodhounds off the scent. That's why the prospectus is called a 'red herring'."

Further uptown a few hours later, Joseph Windaw and Joanne Ankers are lying naked on their backs in a bed in one of the nicer rooms in the older part of the Harvard Club. It has crimson drapes, which are drawn. She is no more than half his size in any dimension and, lying next to him, looks like an exquisite doll with well coifed head and pubic hair. His long penis lies limp on his left thigh. Even with his clothes off, he looks extremely fit. His sparse chest hair is gray but his pubic hair is the same blond as the hair on his head. Both of them have their hands by their sides and are looking toward the high ceiling.

"Now why did we do that?" Joanne asks.

"I think we wanted to," Joe answers languidly. "I certainly did. I find you very attractive. And you being smart as a whip certainly helps."

"Won't this complicate our ability to work together on the hackoff Board?" asks Joanne.

"Doesn't have to," Joe says. "I respected you before. Respect you now. Hope you feel the same about me."

"Yes, of course," says Joanne. "You've been a valuable mentor."

Uncharacteristically, she giggles and then blushes. "I mean on the Board, of course."

"Right," says Joe. "Us old guys have nothing to teach you youngsters anywhere else." He grins at the ceiling but doesn't turn towards Joanne.

"Is there an Ethernet connection in this room?" asks Joanne.

"No. Afraid the Club is a little backward in technology. Just got their website working. You can get a decent dial-up connection from some of the rooms, not others for some reason."

"I'm going to have to go back to my hotel," says Joanne. "Big Router people only stay where they can get high-speed connections and I've got a bunch of stuff I've got to download for a conference call tomorrow morning. How do you know what kind of connectivity there is in all the rooms? Do you do this often?"

"I'm on the Rooms Committee here," says Joe. "I get all the complaints. This was an unexpected, and I should add -- unique -- pleasure. I'm sorry you have to leave early but look forward to working with you on hackoff and possibly some other opportunities."

"They did get the prospectus filed," says Joanne. "I was afraid that would get hung up. They can be sloppy. Seriously though, Joe -- do let me know about any other opportunities. I'm looking for ways to learn more and expand the range of what we do at Big Router Ventures."

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How does this episode, set in February, link to the 26 March press release http://www.hackoff.com/corp/press/release11.html ? The press release is for a registration statement that "has not yet become effective", which sounds like this one, but I can't imagine that they would sit on the news for a month, especially as it is now public information. Doesn't sound like Larry and Donna somehow.

What am I missing?

Good catch, Alan:

The chapter should be entitled "February-March 1999". It starts in February but it was March by the time the prospectus could actually be filed with the SEC. So the date on the press release was correct. Thanks for the help.


I don't know what is happening but my page keeps jumping backward. It's a little disconcerting. I don't know if it is your format or a problem with my laptop, but it doesn't happen anywhere else. My computer nerd is at a wedding so I can't find out why this is happening.


haven't heard that complaint from anyone else but will see what we can find and would appreciate feedback from anyone else experiencing the problem. Can you give any more specifics on when this occurs?


I have the jerking page problem happen in IE, but not in Firefox...

First, I click to to your site from the bloglet email feed and then clicked on to Hack.off from there . I have also googled your blog and from your blog I clicked onto "Hack.off" Same problem.

This time I googled in Netscape "hack.off.com" and clicked onto booksite without going to Fractals of Change website and the jumping was not there.

My computer nerd just came home from the wedding and I'll show him tomorrow.

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