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Three online penny auction companies have joined forces, forming a new trade association to create a sustainable model for protecting consumers and promoting legitimate options for sales in the burgeoning industry.

The newly formed nonprofit Entertainment Auction Association is the creation of major websites such as BidCactus, BigDeal, and Swoopo. The trade association will serve to regulate penny auctions, ensuring companies operate sites under strict guidelines with the sole purpose of providing fair, authentic, and trustworthy play.

Membership is open to businesses agreeing to a strict set of standards, including:

  • Submit to periodic audits by a third-party American Institute of Certified Public Accountants member firm. Audits will verify bids are placed by legitimate users with no use of bots, shill bidding, or bidding by employees. It will also ensure winning auctions are shipped in a timely manner. To be considered for membership, a firm must submit to an initial, $5,000 audit.
  • Commit to a code of conduct ensuring consumers are treated honestly and fairly. Sites passing the audit must adhere to standards, which include clear refund policies, legitimate testimonials, and truth-in-advertising.

The initial $5,000 audit fee is meant to focus membership on businesses — large and small — willing to serve consumers first.

“A full audit is the only real way to guarantee a site is acting ethically,” said Nicholas Darveau-Garneau, CEO of San Francisco-based BigDeal.

In forming the EAA, BigDeal is joined by BidCactus, the oldest U.S.-based company in the industry, and Mountain View, CA-based Swoopo. The EAA will be governed by board members, elected officers, and a paid Executive Director. It will be based in San Francisco.

Penny auctions are an increasingly popular way for consumers to purchase name brand goods at excellent prices. Under the system, users purchase bids before they can play. The bids — typically 60 to 75 cents each — are non-refundable.

Auctions begin at a penny and go up by one cent each time a user bids. With each bid, more time is added to the bid clock. The last user to place a bid when time expires wins the item at its final price — sometimes a small fraction of the retail price.

The penny auction model has emerged as a major consumer outlet on the Internet and has grown rapidly through 2010.