The companies are not quoted on the stock market but were nevertheless able to raise money from investors, some of whom complained to the Department of Trade and Industry. The charges are believed to be the first of their kind involving an Internet company.
An SFO spokesman said yesterday: "There are people who want to take advantage of gullible and ignorant people."
Free Dot Net, an Internet service provider incorporated in August 1996, raised a total of pounds 4m. Discount Telecom, a discount telephone reseller that was set up to offer cheap overseas calls to subscribers, was established in April 1997 and raised more than pounds 800,000 later that year.
According to the SFO, Free Dot Net raised money by subscription from the general public in three tranches starting in September 1996. A second prospectus was issued in October 1997 and a third in March 1999. The SFO began its investigation in June 1998 following a referral from the DTI. The investigation was conducted with the support of the Metropolitan Police.
The SFO said yesterday that four people had been charged with "conspiring to make statements in prospectuses intended to induce persons to enter or offer to enter into investment agreements with Free Dot Net plc which they knew to be misleading, false, deceptive or which dishonestly concealed material facts".
The four people are Jon Brody, Brian Harry Atkins, Marios Andreas Nicolaides and Peter Henry. Mr Brody, Mr Atkins and Mr Henry are directors of Free Dot Net. Mr Brody and Mr Atkins are also directors of Discount Telecom.
Additionally, these four and two others, Gerard William Kavanagh and Katherine Louise Diggins, described as associates of the directors, have also been charged with conspiring to defraud shareholders and investors in both companies by "dishonestly diverting sums of money received from shareholders and investors for purposes other than those for which monies were received".
The six people were charged at Charing Cross Police station in London on 10 December. They have been released on unconditional bail after appearing in the magistrates court earlier this week. No date has been set for a court hearing.
The two companies are still in business, although calls to Free Dot Net last night were not being answered. Lawyers acting for those charged could not be reached for comment last night.
The charges come at a time of growing concerns on the part of the authorities about the indiscriminate nature of some of the investment going into the Internet sector, which is creating fertile ground for potential fraud.
Many legitimate start-ups have no track record and are heavily loss-making.
Outlook, page 17