Add this to the freebies being showered on those with high Klout scores: equity stakes in startups.
That's the model behind Wahooly, a soon-to-launch startup that is partnering with the social-influence measuring site Klout to help it identify influential social-media users to whom it will offer free equity stakes in, well, other startups. The size and potential value of the stake will grow or shrink depending on the amount of social buzz generated on the startup's behalf.
It's a unique business model, an inevitable twist in a world where marketers of all stripes are looking for ways to identify and leverage so-called "influencers" on services like Twitter and Facebook. But it's one that could run afoul of Federal Trade Commission and securities regulations.
According to Wahooly's co-founder, Dana Severson, the current goal is to launch the site in January with 25,000 users -- at least 15,000 of whom will be delivered by Klout, consisting of people registered for the service with scores of at least 45 out of a possible 100. No cash will be exchanged between Klout and Wahooly, but it's another perk Klout can pass on to its most influential users.
Users who have opted in to Wahooly will then receive emails about 200 startups over the course of the following year with the company's pitch, the number of stakes being offered, and the total percentage up for grabs offered on a first-come, first-served basis. Wahooly gets at least 1% of each startup and will ultimately charge service fees for being the liaison between equity stakeholders and the startups, Mr. Severson said.
Equity stakeholders who do nothing will see their stake get diluted "just like a stock splitting," said Mr. Severson, though he said it would never dwindle to zero.
A 2009 revision to the FTC's guide to the use of testimonials and endorsements in advertising stipulates that social-media agents should make a disclosure when they're promoting a product they've been given for free or a company they have a material connection to. Mr. Severson says he's consulted with lawyers and concluded Wahooly isn't subject to these regulations, since the equity stakes will be worthless at the time of their distribution.
"Our users aren't getting paid for anything. They're not receiving anything of value. It may be worth zero in the end. We just don't know," said Mr. Severson.
But according to Linda Goldstein, chair of the advertising, marketing and media division at the law firm Manatt, Phelps & Phillips, the fact that the stakes have a potential future value constitutes a material connection that would make them subject to the regulations.
"If you're an equity stakeholder in a company, I can guarantee that the FTC is going to think that 's a relationship that needs to be disclosed," she said.
In a statement, the FTC's director of its division of advertising practices, Mary Engle, said: "The Endorsement Guides call for the disclosure of material connections between an endorser and a marketer. Material connections include an ownership interest. If someone's equity interests will be increased the more positive things they say about the company, then they have a financial connection to the company that should be made clear when they endorse the company."
With respect to securities regulations, Mr. Severson said that Wahooly is looking to structure itself like a venture capital fund, in which it would be the sole shareholder and represent the interests of its users, and thereby avoid registering itself and the startups it represents with the Securities and Exchange Commission as public companies. (Under normal circumstances, companies with more than 500 shareholders need to submit public filings on their financials.)
However, the SEC has a history of cracking down on so-called "free stock" offerings that seek to be exempted from registration on that basis. In essence, if the entity's relationship with its stakeholders is an investment contract where there's an expectation of profit to be made off of their efforts, then the SEC doesn't view the stake as "free."
"The SEC view of free is something where there's no expectation of anything in return," said Brian Lane, a partner at the law firm Gibson Dunn & Crutcher and former division director for corporation finance at the SEC.