Los Angeles Times (LT) - SUNDAY October 20, 1996 Edition: Home Edition Section: Business Page: 1 Pt. D Story Type: Column Word Count: 1,232
Tom Petruno; Times Staff Writer

Take, for example, this unsolicited e-mail (electronic mail) that has shown up in computer mailboxes of perhaps millions of people around the country recently.

It's from a company called Royce Biomedical, which professes to be a manufacturer and exporter of home testing kits for the HIV virus, for other diseases and for pregnancy. Royce also thinks it has a hot stock that the world deserves to know about.

"Royce Biomedical announced that it recently received a strong 'BUY' recommendation from Morgan's Special Situation Report," the e-mail begins. "The report recommended Royce, currently in the $2 range, with an initial price target of $6."

The come-on gets much bolder as you read further: "The size of Royce's target markets combined with its small capitalization leave an EXPLOSIVE potential for the company's share price over the next 6-12 months."

If that hook doesn't get you, you're invited onto Royce's home page on the World Wide Web, where you learn a little about its diagnostic test kits and where it expects to sell them, a little about management, but absolutely nothing about the company's finances.

You do find out, however, that while Royce's 7,000-square-foot "operations" center is in Irvine, its corporate office is in Vancouver, Canada--a city infamous for its population of penny-stock promoters, many of dubious background.

Royce's unsolicited e-mail is known as a "spam," and spamming is a growing irritation for Internet users, who often sign on to find their electronic mailboxes filled with unwanted come-ons from companies with stuff to sell.

There's nothing illegal about marketing in and of itself, of course. Anyone can send you any sales pitch through the mail or over the phone. The Internet is just another delivery system, and as with more traditional mediums, you can simply choose to ignore messages that don't interest you.

*

But there must be something particularly galling about investment pitches made over the Internet, because the Securities and Exchange Commission is getting an earful from angry spamees.

"Spams are just about the No. 1 complaint we get here with regard to the Internet," said John Stark, counsel for Internet projects at the SEC in Washington. He estimated that he gets 30 to 40 complaints a day about such pitches.

Yet the SEC can only monitor spam activity. It can't prohibit it, nor would it try, Stark said, reminding spamees that the 1st Amendment also extends to cyberspace. Even so, he added, the 1st Amendment "doesn't allow someone to commit fraud." Drawing that line, however, is a tough exercise when it comes to stock promotion.

It's not hard to understand why a small company looking for investors would market over the Internet. The medium is low-cost, high-speed and has the potential to reach millions of people worldwide.

And unlike a "cold call" telephone solicitation from a broker--who may not be able to get the pitch out before you hang up--an Internet message sits there, in full, in your electronic mailbox. Chances are you'll be tempted to read it through.

*

Royce Biomedical's spam is about as brash as they get. The firm has little in sales to speak of, and assets of about $800,000, according to its operations chief in Irvine, Chandravadan Patel.

Royce became publicly traded not through a formal underwriting, but via its principals' purchase of a "shell" firm with basically no assets--but with the all-important ability to issue stock. By convincing a couple of brokerages to make a market in the stock, Royce qualified in May to have its shares traded on the Bulletin Board, the barely regulated part of the Nasdaq market.

Royce's e-mail bursts with optimism about the future. The company's strategic plan is to sell its diagnostic medical tests in the Third World at cheap prices. But Royce itself won't be doing the selling: It will require foreign distributors for that, and the e-mail informs potential investors that "Eight major medical product distributors, covering several key target countries, are presently negotiating distribution contracts."

Moreover, the company says confidently, "Any one of these sales agents could give Royce the cash flow necessary to become a highly successful company and a stellar stock performer."

Asked to expound a bit more, Patel--whose bio says he holds a master's degree in organic synthetic chemistry and a doctorate in clinical biochemistry--confirmed that Royce doesn't have federal approval to sell its diagnostic kits in the United States, because "we'd need a couple hundred thousand dollars to get that" by first sponsoring clinical trials.

So instead, the kits will be sold overseas at what Patel said could be "100% profit." His potential distributors, he said, "are saying that they have orders and they're ready to market."

And how many competitors would Royce face in Third World countries? For HIV tests, Patel estimated there are "only five or six companies" competing.

Dan Maarsman, who handles Royce's communications from Vancouver, said the company expects to compete through low prices on its kits because, as he noted without a trace of irony, "we're not Johnson & Johnson--we can produce the same kits without a lot of overhead."

*

However much Royce might like to sell disease-testing kits to poor people overseas, its e-mail campaign suggests its more immediate goal is to sell American investors on its stock, thereby driving the share price up.

Maarsman is nothing if not candid about the intended consequence of the e-mail campaign. "If people have stock and want to sell it," he noted, they need interested buyers. "Getting the word out to the public is the toughest thing."

Luckily for companies like Royce, there is no shortage of people to help get the word out--for the right compensation.

As noted above, the "peg" for Royce's e-mail spam is the new tout from Morgan's Special Situation Report stock newsletter, which is put out by Roland Perry, a Beverly Hills-based publisher of seven such letters.

Royce's e-mail says of Morgan's: "The editor stated that Royce is 'eerily' similer (sic) to Biomerica, which was recommended by Morgan's at $1.80 and ran to $9.75 in a little more then (sic) a year (1995-1996)."

*

What the spam doesn't say is that Perry has received Royce stock in compensation for reviewing the company. How much stock? He declined to say.

Perry would obviously benefit if a herd of new investors suddenly bid Royce's share price higher, based on Perry's and the company's hype. But no one would benefit more than Ken Pappas, Royce's president, who owns 2,050,000 of the firm's 3,134,167 shares outstanding.

Pappas isn't a medical man by training. Rather, he heads a Vancouver restaurant chain called Knight and Day. "They're big restaurants," Maarsman said.

Does Royce Biomedical have a future? Your guess is probably as good as management's, and maybe even better. Experienced investors will undoubtedly recoil instantly from stock spams like Royce's, given their wild hype. But less-knowledgeable investors may be sucked in without thinking about the risks involved, and who stands to benefit most if the stock price suddenly surges.

At the SEC, John Stark says the commission doesn't think it needs to write new rules governing investment information on the Internet. All the SEC can hope, he said, is that people use common sense.

Always watch for outdated information. This article first appeared in 1996. This material is designed to support, not replace, the relationship that exists between you and your doctor.

AEGiS presents published material, reprinted with permission and neither endorses nor opposes any material. All information contained on this website, including information relating to health conditions, products, and treatments, is for informational purposes only. It is often presented in summary or aggregate form. It is not meant to be a substitute for the advice provided by your own physician or other medical professionals. Always discuss treatment options with a doctor who specializes in treating HIV.

Copyright ©1980, 1996. AEGiS. All materials appearing on AEGiS are protected by copyright as a collective work or compilation under U.S. copyright and other laws and are the property of AEGiS, or the party credited as the provider of the content. .