The Federal Trade Commission is investigating online social network direct marketing firm Classmates Media Corporation over its subscription renewal practices, according to documents filed with the Securities and Exchange Commission.
The company — whose site Classmates.com serves as a hub for people to reconnect with old high school, college, military and workplace acquaintances — said that in June it received a letter from the FTC saying it was conducting an inquiry into the company’s sale of paid subscriptions to consumers.
Much of the material Classmates provided to the FTC surrounded its use of auto-renewals, the firm said.
“A significant majority of Classmates Online paying subscribers are on plans that automatically renew in accordance with their terms at the end of the subscription period,” the company said in an S-1 form detailing the firm’s planned initial public offering.
The company warned that the FTC’s inquiry could result in serious damage its ability to stay viable.
“Any changes in Classmates Online’s automatic renewal practices, whether voluntary or as a result of the FTC inquiry could have a material impact on the churn rate of our social networking members which in turn could negatively impact our ability to maintain our number of paying subscribers,” the company said.
As of September, Classmates — which offers free services to those who want to locate old friends and acquaintances, but requires a paid membership to be able to contact them through its system — had just under 3 million paying subscribers, up from just over 2 million in September 2006.
The company said its average monthly churn rate is about 4.6% and that it achieves $3.33 per month in revenue on average from each paid subscriber.
Classmates was founded in 1995. Its properties include loyalty firm MyPoints, and StayFriends Web sites in Sweden and Germany.
Classmates said in the SEC filing that it plans to offer 12 million shares priced from $10 to $12 per share. It plans to use $50 million of the proceeds to pay off debt to parent company United Online, which will retain a controlling interest in the firm.
The price of the planned stock offering puts the overall values of Classmates in the range of $600 to $700 million.
For the first nine months of 2007, the company reported net income of $1.65 million on revenue of $140.1 million. For all of last year, it posted a loss of $1.9 million on sales of $139.4 million.
The company claims it has 50 million registered members.
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