An IPO in VoIP for Vonage

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Internet phone company Vonage Holdings Corp. filed documents with the Securities and Exchange Commission Tuesday outlining an initial public offering that could raise as much as $250 million.

Vonage -- which has the largest base of voice-over-Internet-protocol telephony subscribers in the country, about 1.4 million -- had been rumored to be putting together an IPO for months. But earlier reports of a possible Vonage IPO were for much larger amounts -- about $600 million.

Vonage intends to use the proceeds from the IPO to fund expansion of its business and marketing expenses and cover operating losses.

Raising the money may be a little tougher than expected. Vonage is headed by Jeffrey Citron, who was fined by the SEC in 2003 for a series of securities-law violations tied to his involvement with online brokerages Datek Securities Corp. and Datek Online Holdings Corp. Citron and other Datek executives were fined $70 million (he paid $22.5 million) and barred from being associated with any securities broker or dealer.

Citron may be free to continue his involvement with Vonage, but the company admitted in its IPO filing that his past history could spook some potential investors.

“There is a risk that some third parties will not do business with us, that some prospective investors will not purchase our securities or that some customers may be wary of signing up for service with us as a result of the past SEC and NASD settlements and related allegations against Mr. Citron,” Vonage said in the filing.

The company added that it believes some financial institutions and accounting firms have declined to do business with Vonage in the past because of its founder’s checkered past.

Perhaps to take some of the heat off the relationship with Citron, Vonage said he will give up his CEO title to former ADT Security Services Inc. president Michael Snyder, who will become CEO effective Feb. 27.

According to the IPO prospectus, Snyder will be responsible for the day-to-day management and operations of Vonage, including the supervision of finance, accounting, human resources and legal affairs. Citron will become chairman of the board and chief strategist, retaining responsibility for overall strategy technology matters, employee culture and public relations.

Vonage has grown rapidly since its inception in 2002. According to the IPO prospectus, revenue has grown from $971,000 in 2002 to $79.7 million in 2004. In the first nine months of 2005, revenue was $174 million.

But as revenue has grown, so have losses. Vonage’s net loss in 2002 ($12.7 million) has ballooned to $69.9 million in 2004 and $189.6 million in the first nine months of 2005.

Vonage has managed to secure financing in the past, however. According to the prospectus, Vonage’s backers -- 3i Group plc, Bain Capital LLC, Institutional Venture Partners, Meritech Capital Partners, New Enterprise Associatesand Citron -- have collectively pumped about $400 million into the company as of Sept. 30.

The prospectus does not state how many shares will be sold to the public, nor does it offer a price range for the shares. Citron is currently Vonage’s largest shareholder with 141 million shares (41% of its outstanding stock), but the document did not say if that position will change after the IPO.

Citigroup Inc., Deutsche Bank Securities and UBS Investment Bank were listed as underwriters for the offering in the prospectus.

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