(Photo: Shoptiques)

What's a good publicity stunt without a stable of pretty women? Apparently even Y Combinator startups fall prey to that age-old logic. DNAInfo reports that Shoptiques, a fashion marketplace for local boutiques, has planned an elaborate jaunt around Manhattan today to dole out free hugs in exchange for some brand recognition. And judging from their Facebook page, looks like they'll also have a ton of hot pink swag in tow.

Starting at 11 a.m., five models will begin giving free hugs out in SoHo, then travel up through Washington Square Park, Union Square, Times Square and end at Columbus Circle. The whole schtick is so well-planned that you can even track the models' location on a sweetly-drawn map on Shoptiques' website.

Shoptiques launched earlier this year, backed by Andreessen Horowitz and Greylock, as a one-stop shop for local boutique fashion. The startup works to aggregate the inventory of small boutiques in cities like New York, Chicago and Los Angeles so that users can buy things from shops--both local to them and not--easily online.

Writes TechCrunch:

If a customer chooses to purchase an item on the site, Shoptiques will immediately send the boutique an email with the order, and a printable FedEx label with the customer’s address. The startup handles all of the payment processing, and takes an undisclosed fee from each transaction.

It's a neat concept, and browsing through the collection of bow flats and dainty necklaces, one that had us wishing we hadn't already blown our entire paycheck on drinks and cabs.

Of course, we're a little skeptical of using models to ratchet up brand awareness. A lingering embrace from a statuesque model is a stunt that typically appeals to straight dudes--and Shoptiques currently only sells clothing to women. If they'd hired male models to give some hugs, there might be a queue of fashion-forward ladies in SoHo waiting for their turn right about now.

Cheers, Mr. Systrom!

Things sure do happen fast when you're wicked popular. On Facebook, Mark Zuckerberg just announced that his social network has agreed to acquire the photo-sharing darling Instagram, adding that "their talented team will be joining Facebook." In a press release, Facebook says the deal was for a jaw-decimating $1 billion "in a combination of cash and shares of Facebook."

The news follows a whirlwind week for the clubby favorite. After launching on Android last Tuesday,  the startup picked up an additional million users (it already had 30 million iPhone users) in 12 hours. That kicked off rumors via AllThingsD on Friday that Sequoia was close to investing $50 million for a Series B round that valued the startup at $500 million, which TechCrunch just confirmed.

Just before the acquisition, TechCrunch reports, Instagram closed a $50 million Series B round from Sequoia, Thrive Capital*, Greylock and Benchmark at the expected $500 million valuation. "Investors, many of whom didn’t know about the Facebook acquisition, literally doubled their money (which was wired to Instagram on Thursday) overnight."

On the Instagram blog, CEO Kevin Systrom assured users that Instagram will remain in tact after the acquisition:

"It’s important to be clear that Instagram is not going away. We’ll be working with Facebook to evolve Instagram and build the network. We’ll continue to add new features to the product and find new ways to create a better mobile photos experience.

The Instagram app will still be the same one you know and love. You’ll still have all the same people you follow and that follow you.You’ll still be able to share to other social networks. And you’ll still have all the other features that make the app so fun and unique."

Zuck reiterates the point in his post, adding:

"We believe these are different experiences that complement each other. But in order to do this well, we need to be mindful about keeping and building on Instagram's strengths and features rather than just trying to integrate everything into Facebook.

That's why we're committed to building and growing Instagram independently. Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.

We think the fact that Instagram is connected to other services beyond Facebook is an important part of the experience. We plan on keeping features like the ability to post to other social networks, the ability to not share your Instagrams on Facebook if you want, and the ability to have followers and follow people separately from your friends on Facebook."

It's worth noting that this isn't the first time Facebook has tried to get Mr. Systrom on board. Both Mr. Zuckerberg and Adam D'Angelo approached Mr. Systrom, through connections with the Stanford frat Sigman Nu, when they first came out to Palo Alto. Mr. Systrom turned them down to stay in school, before joining Odeo, which eventually became Twitter. Hence his sweet first-name-only handle, @Kevin.

If the $50 million valuation wasn't enough to make you sing "Hey Jealousy," you're probably too blacked out in rage to read this post.

Someone put the Hipstamatic dudes on suicide watch.

— Lindsay Kaplan (@lindsaykap) April 9, 2012

*Disclosure.

Mr. Arrington flashes his "first amendment" gang sign.

Betabeat published a story yesterday about the ways in which tech investors who write about private companies on public blogs might run afoul of SEC regulations. It focused, naturally, on Mike Arrington, who saw the post around 2 a.m. this morning and responded with this tweet:

"Screw that. Let me introduce you to the first fucking amendment to our constitution."

Mr. Arrington failed to provide any links to the first amendment, but luckily, Betabeat had spent yesterday afternoon conversing with Prof. John Coffee of Columbia University, one of the foremost experts on securities law in the nation.

"I do agree with Ralph Ferrara that the rules established by the Securities and Exchange Act of 1934 apply to public discussion of private companies in the same way it does to public companies," said Prof. Coffee.

Prof. Coffee also agreed with Mr. Arrington that the first amendment offers some protections to bloggers writing about private companies in which they are investors with inside knowledge. "It's not just about the sin of omission. Otherwise it would be impossible for anyone to write about companies with attaching a full prospectus to every post."

The argument, should a case go to court, says Prof. Coffee, would be about proving deception. "Can you prove that this blogger wrote something which wasn't their honest opinion, or show that they intended to deceive others?"

The portion of the Securities and Exchange Act of 1934 on which all this hinges is section 10 b-5: Employment of Manipulative and Deceptive Practices:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

1. To employ any device, scheme, or artifice to defraud,
2. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
3. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

So the answer is, yes and no. Investors like Reid Hoffman, who wrote a post on TechCrunch about why Greylock invested in Groupon, are not guilty of fraud simply because they neglected to mention, let's say, the $400 million a year Groupon was losing.

But by blogging publicly about the investment, and knowingly omitting a material fact about the company's finances, Mr. Hoffman opened himself up to an investigation by the SEC or charges of fraud from investors who believe they suffered a financial loss as a result of his post (see Rochez Bros. vs Rhoades).

In Mr. Hoffman's case, charges of market manipulation might center around the long expected IPO or the robust secondary market for trading equity in Groupon. And as Prof. Coffee points out, the fact that the secondary markets are much smaller and far less transparent than the public markets, means that manipulation is a much more serious issue.

"Especially in the very thin, private secondary markets, where there is little liquidity and share prices are more subject to manipulation, investors who blog publicly and don't disclose contrary interest, are in violation of 10 b-5."

P.S.--"The winner from this group receives the Disrupt Cup and $50,000, taking over possession from Disrupt New York winner Getaround. Without further ado, the runners-up is Prism Skylabs. And the winner is…Shaker! Disclosure: TechCrunch founder Michael Arrington is an investor in Prism Skylabs and is a pending investor in Shaker."

Image via BacktoGeek

Has Blogging Become the New Insider Trading?

“People think there is a distinction between how an major investor can talk about a public company versus a private company,” said Ralph Ferrara, former General Counsel for the SEC. “But if you read the law carefully, you see that everything that you can do wrong when combining a public company with the media applies to investments in private companies as well.”

Michael Arrington wanted to have it all. The editor-in-chief of TechCrunch, the nation’s most powerful tech blog, had, except for a brief hiatus, invested his own money in the companies he covered. The move always prompted a bit of grumbling in the blogosphere, but nothing he couldn't handle.

Then Mr. Arrington decided to go bigger. He tapped Silicon Valley’s royalty to raise a $10 million pool he dubbed CrunchFund.

According to sources familiar with the fund, it was only after these commitments were made that Mr. Arrington approached his corporate overlords at AOL to inform them of his plans. Initially upper management was nervous about the potential conflict of interest. Mr. Arrington was, after all, running the crown jewel of AOL’s new journalistic empire. “He explained to them that this was nothing unusual, and pointed out that Om Malik works for True Ventures and runs GigaOm,” the source said.

The answer seemed to satisfy AOL, which gave Mr. Arrington its blessing...and an additional $10 million in corporate cash to invest. When CrunchFund became public just before Labor Day, however, the result was a media firestorm. Mr. Arrington was fired (twice) and quit (once), before eventually parting ways with TechCrunch on an amicable note. It all made for great theater—but it also signaled that something significant was happening. The increasingly incestuous relationship between investors in private technology companies and the new media publishers who cover them had become to big to ignore.

Anyone watching the industry closely could see this conflict coming. TechCrunch, GigaOm, Business Insider and yes, Betabeat, are all backed to some extent by venture funds or individuals who also invest in the companies the blogs cover (BetaBeat is owned in part by Josh Kushner of Thrive Capital). All maintain rules about disclosure when writing about companies their own backers fund, but no marriage of media and money is ever completely cut-and- dry.

In January, for example, Reid Hoffman of Greylock Parnters, which invested in Mr. Arrington’s new CrunchFund, took advantage of Mr. Arrington’s soap box with a long “guest post” for TechCrunch explaining why his firm had chosen to invest in the controversial daily deal giant Groupon.

“It takes a lot of conviction in the future of a business to pull out your checkbook when the pre-money valuation has this many zeroes,” intoned Mr. Hoffman, laying out his justification for TechCrunch readers, as well as, no doubt, the powerful limited partners who back Greylock.

Investors like Greylock typically have access to a company’s financials before committing to new funding. But there was little mention of accounting in this post. Instead Mr. Hoffman cited Groupon’s smart use of data and its sense of humor as the basis for his confidence that the company would emerge as the leader in capturing the $100 billion local advertising market. Less than five months after his post, Groupon filed for an IPO.

There was no mention in Mr. Hoffman’s item of the fact that Groupon was bleeding red ink—losing, depending on who’s accounting you prefer, anywhere between $100 and $400 million last year. He did note Groupon’s staggering growth, but neglected to touch on the corresponding explosion in hiring the company oversaw. Last week Groupon’s sales force filed a class action lawsuit alleging the company had failed to pay them millions in overtime. On the website Glass Door, a forum that allows workers to comment anonymously about their employers, members of the sales force described a boiler room atmosphere were employees were afraid to take bathroom breaks and cried at their desks.

What is Mr. Hoffman’s responsibility, if any, to investors who may decide to put money into Groupon based on his post? The conventional wisdom holds that rules governing how investors can use the media vary depending on whether a company is private or public. In the latter instance, the SEC has strict guidelines governing how the financial health of a company is represented to the public by insiders.

But the landscape is evolving rapidly. The emergence of robust secondary markets like SharePost and SecondMarket, which allow investors to purchase shares in private companies like Facebook, Twitter and Groupon, means thousands of smaller investors—with access to far less information than VC insiders—are getting in on the action. In theory, some may well have purchased shares in Groupon before their S-1 revealed their precarious financial situation—possibly after reading Mr. Hoffman’s endorsement.

“People think there is a distinction between how an major investor can talk about a public company versus a private company,” Ralph Ferrara, former General Counsel for the SEC, told Betabeat. “But if you read the law carefully, you see that everything that you can do wrong when combining a public company with the media applies to investments in private companies as well.”

Betabeat reached out several times to Greylock Partners for comment, but so far has received no reply.

According to Mr. Ferrara, there is a provision of the Securities and Exchange Act of 1934—often overlooked and typically unappreciated by investors and the lawyers who represent them—which that applies not only to public companies but to private securities as well: Section 10 b-5. Mr. Ferrara explained, "When an investor or insider is engaged in an omission which proves to be a deception, and the result of that was a financial loss to another investor, a case for fraud can be made.”

On Monday Mr. Arrington kicked off the TechCrunch Disrupt Conference, an extremely lucrative three-day orgy of back-slapping bonhomie between the TechCrunch editorial team and the companies they cover. Mr. Arrington began by announcing that he was stepping down, but he made no apologies for the conflict that caused his resignation. In fact he wore a T-shirt that read “unpaid blogger”—a middle finger to Arianna Huffington, and a play on the fact that while he had officially resigned, he has every intention of continuing to write about the companies he invests in.

For the first event of the conference, Mr. Arrington sat down for a friendly “fireside chat” with Greylock’s Reid Hoffman.

“I love the shirt,” said Mr. Hoffman.

“You can buy one on Zaarly, or not on Zaarly, dammit,” Mr. Arrington blustered, before adding jokingly, “I already said something I shouldn’t have about a company I invested in.”

Talk quickly turned to Mr. Arrington’s own drama. “I don’t have any doubts about TechCrunch, or your integrity,” Mr. Hoffman said seriously.

“But do you think all the drama around me hurts the companies?” said Mr. Arrington, the brazen provocateur suddenly concerned about media attention. “That worries me sometimes.”

Mr. Arrington began to needle Mr. Hoffman about what deals he was in. “As an investor, you really shouldn’t be talking about this stuff,” Mr. Hoffman warned, squirming a bit in his chair in front of a thousand journalists and industry insiders.

“All I want to say is, nicely done,” concluded Mr. Arrington. “You’ve got to get me in on some of these deals.”

“Likewise,” said Mr. Hoffman. And with that, it was back to business as usual.

Disclosure.

Marc Andreessen

The current wave of IPOs that investors hope will extend from LinkedIn through Groupon and onto Facebook is making some venture capitalists very, very wealthy. But the bonkers bubble money isn't exactly getting spread around. Bloomberg reports that the success of firms like Sequoia, Greylock, Accel, and Andreessen Horowitz, all of whom have equity in the most valuable start-ups, is driving a massive wedge between "the venture-capital industry’s haves and have-nots."

LinkedIn's IPO, for example, has already yielded $2 billion in paper profits for backers like Sequoia and Greylock. Groupon hasn't gone public yet, but its top investors like Accel and New Enterprise could end up owning a $5 billion stake. These are accredited private investors we're talking about, so it's not as though the VC-equivalent of the top one percent is making paupers of their competitors. But it is creating vastly disproportionate access to deal flow and capital.

David Schwartz, co-chair of the emerging companies and venture-capital practice at Michelman & Robinson in New York tells Bloomberg:

“The rich are getting richer, and they’re finding the better products and better companies at better valuations. It’s making it very complicated for second-tier funds.”

The drought of IPOs through over the past few years lowered the number of active VC firms. But although the NVCA says fundraising has jumped 76 percent (year-over-year) in the first quarter to $7.1 billion, it might not get funneled toward the recession's "walking dead": firms that are only working with their existing portfolio and lacking cash to make new investments.

Nonetheless, their loss might clear the brush for newer firms like Mike Maple's Floodgate Fund and Boulder's Foundry Group, which was Zynga's first venture investor. These younger firms have the benefit of being on top of newer trends like mobile apps and social networking, entrepreneur Eric Ries tells Bloomberg. Plus, we imagine, they don't have the stench of dashed dreams from the last bubble.