LOOK (MM)

Proposal 2 - Approval of Proposed Charter Amendments

General

The board has adopted a resolution approving, subject to approval by stockholders, a proposed range of amendments to the certificate of incorporation of the Company to effect a reverse stock split of the common stock of the Company, at the discretion of the board, whereby a number of outstanding shares of the common stock would be combined into and become one share of common stock (the "Proposed Charter Amendments").

If the Proposed Charter Amendments are approved by stockholders, the exact number of shares to be combined into and become one share would be determined by the board, in its discretion, following the Annual Meeting. Approval of the Proposed Charter Amendments would authorize the board, in its discretion, to effect a reverse stock split prior to the 2014 annual meeting of stockholders in any of the following split ratios: 1:2; 1:3; 1:4; 1:5; 1:6; 1:7; 1:8; 1:9; or 1:10, or to abandon the Proposed Charter Amendments and not effect any reverse stock split. The actual timing for implementation, if any, of the reverse stock split would be determined by the board.

We currently anticipate that, if the reverse stock split is approved by stockholders, the reverse stock split would be implemented as soon as practicable after the Annual Meeting, subject to the board's final determination of the split ratio. If the reverse stock split is not implemented prior to the 2014 annual meeting, the Proposed Charter Amendments will be deemed abandoned, without any further effect. In that case, the board may again seek stockholder approval at a future date of a reverse stock split if the board deems a reverse stock split to be advisable.

LookSmart, Ltd. - Preliminary Proxy Statement - 2013 Annual Meeting - Subject to Completion

Reason for the Reverse Stock Split

The principal reason for the reverse stock split is to increase the per share trading price of the common stock which could help to ensure a share price high enough to satisfy the $1.00 per share minimum bid price requirement for continued listing on The NASDAQ Capital Market. However, there can be no assurance that the trading price of the common stock would be maintained at such level or that we will be able to maintain the listing of our common stock on The NASDAQ Capital Market. If stockholders do not approve the reverse stock split or if the board decides not to effect the reverse stock split, and the trading price of our common does not otherwise increase to and remain greater than $1.00 per share, we believe that the common stock will be delisted from The NASDAQ Capital Market.

The common stock currently trades on The NASDAQ Capital Market. In order to continue trading on The NASDAQ Capital Market, we must satisfy the continued listing requirements for that market. The NASDAQ Capital Market requires a minimum bid price of $1.00 per share for continued listing.

The board believes that the delisting of the common stock from The NASDAQ Capital Market would likely result in decreased liquidity. As a result of the loss of these market efficiencies associated with The NASDAQ Capital Market, the board believes that the delisting of the common stock from the NASDAQ Capital Market would likely result in decreased liquidity, thereby increasing the volatility of the trading price of the common stock and a diminution of investor interest. The board also believes that such delisting could also cause a loss of confidence of business partners, customers, and employees of the Company, which could harm the business and future prospects of the Company.

If the common stock were delisted from The NASDAQ Capital Market, the common stock would likely still qualify to trade on the OTC Markets ("OTC Markets"). The board believes that in this event, stockholders would likely find it more difficult to obtain accurate quotations as to the price of the common stock, the liquidity of the common stock would likely be further reduced, making it difficult for stockholders to buy or sell our stock at competitive market prices or at all, and support from investors and/or market makers that currently buy and sell the common stock would likely decline further, possibly resulting in a further decrease in the trading price of the common stock.

In evaluating whether or not to authorize the reverse stock split, in addition to the considerations described above, the board also took into account various negative factors associated with a reverse stock split. These factors include: the negative perception of reverse stock splits held by some investors, analysts, and other stock market participants; the fact that the stock price of some companies that have effected reverse stock splits has subsequently declined back to pre-reverse stock split levels; the adverse effect on liquidity that might be caused by a reduced number of shares outstanding; and the costs associated with implementing a reverse stock split.

The board considered these factors, and the potential harm of being delisted from The NASDAQ Capital Market and determined that continued listing on The NASDAQ Capital Market is in the best interest of the Company and its stockholders, and that a reverse stock split is necessary to attempt to maintain the listing of the common stock on The NASDAQ Capital Market. The board believes that stockholder approval of the Proposed Charter Amendments which authorizes the board to effect a reverse stock split within a range of split ratios (1:2 through 1:10, inclusive), as opposed to approval of a reverse stock at a single specified split ratio, provides the board with increased flexibility to achieve the principal purpose of the reverse stock split as described above while also seeking to minimize, to the extent consistent with this purpose, the possible decreased liquidity which may result from a reduction in the number of outstanding shares. In determining the reverse split ratio, the board will consider numerous factors, including the historical and projected performance of the common stock, the projected performance of the Company, prevailing market and industry conditions and general economic trends, and will place emphasis on the expected closing price of our common stock over the short and longer period following the effectiveness of the reverse stock split with a view to enabling us to meet, for the foreseeable future, The NASDAQ Capital Market's minimum bid price requirement for continued listing. Even if stockholders approve the reverse stock split, the Company reserves the right not to effect the reverse stock split, including if the board does not deem it to be in the best interests of the Company and its stockholders.

LookSmart, Ltd. - Preliminary Proxy Statement - 2013 Annual Meeting - Subject to Completion

In addition, in determining to authorize the reverse split, the board considered that a sustained higher per share price of the common stock, which may result from the reverse stock split, might heighten the interest of the financial community in the Company and potentially broaden the pool of investors that may consider investing in the Company, possibly increasing the trading volume and liquidity of the common stock or helping to mitigate any decrease in such trading volume and liquidity which might result from the reverse stock split. However, as noted above, there can be no assurance that the price of the common stock would remain above $1.00 per share following a reverse stock split.

The board also believes that a higher per share market price for the common stock may help us attract and retain employees. The board believes that some potential employees are less likely to work for a company with a low stock price, especially below $1.00 per share, regardless of the company's market capitalization. However, again, there can be no assurance as to the market prices for the common stock following a reverse stock split or that increased market prices for the common stock will in fact enhance our ability to attract and retain employees.

There also can be no assurance that, after the reverse stock split, we would be able to maintain the listing of the common stock on The NASDAQ Capital Market. The NASDAQ Global Market has other continued listing requirements applicable to the listing of the common stock, including as to minimum stockholders' equity, minimum publicly held shares, minimum market value of publicly held shares, minimum stockholders, minimum market makers, and compliance with corporate governance rules. While the Company is currently in compliance with these other requirements of The NASDAQ Capital Market, there can be no assurance that the Company will be able to maintain compliance with all of these requirements or the minimum bid price requirement.

Stockholders should recognize that if a reverse split is effected, they will own a smaller number of shares than they currently own (approximately equal to the number of shares owned immediately prior to the reverse stock split divided by two, three, four, five, six, seven, eight, nine, or ten, depending on which split ratio is implemented and after giving effect to the cash payments in lieu of fractional shares described above). While we expect that the reverse split will result in an increase in the market price of our common stock, the reverse split may not increase the market price of our common stock in proportion to the reduction in the number of shares of our common stock outstanding or result in a permanent increase in the market price (which depends on many factors, including our performance, prospects and other factors that may be unrelated to the number of shares outstanding).

If a reverse stock split is effected and the market price of our common stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of a reverse stock split. Furthermore, the liquidity of our common stock could be adversely affected by the reduced number of shares that would be outstanding after the reverse stock split. In addition, the reverse split will likely increase the number of our stockholders who own odd lots (less than 100 shares). Stockholders who hold odd lots typically will experience an increase in the cost of selling their shares, as well as potentially greater difficulty in effecting such sales. Accordingly, a reverse stock split may not achieve the desired results as described above.

Principal Effects of the Reverse Stock Split

The reverse stock split would have the following effects on our common stock and securities convertible into or exercisable for shares of our common stock:

LookSmart, Ltd. - Preliminary Proxy Statement - 2013 Annual Meeting - Subject to Completion

As a summary and for illustrative purposes only, the following table shows approximately the effect on our common stock of the three potential reverse stock splits, based on 17,293,237 shares of common stock issued and outstanding as of the close of business on July 19, 2013 and assuming the reverse stock split became effective at the close of business on July 19, 2013:

The board believes that maintaining the same number of authorized shares of common and preferred stock, and thereby increasing the number of shares of common stock available for future issuance, will provide us with the certainty and flexibility to undertake various types of transactions, including financings, acquisitions of companies or assets, strategic transactions including a sale of all or a portion of the Company, increases in the shares reserved for issuance pursuant to stock incentive plans, sales of stock or securities convertible into common stock, or other corporate transactions not yet determined. Certain kinds of these transactions may have anti-takeover affects as described in more detail below, and certain kinds of these transactions may require stockholder approval under Delaware law or applicable NASDAQ rules, but the board believes that this certainty and flexibility is helpful to the Company and in the stockholders' interests. We currently have no plan, arrangement or agreement to issue shares of our common stock for any purpose, except for the issuance of shares of common stock pursuant to our stock option and employee stock purchase plans. If we issue additional shares, the ownership interests of holders of our common stock may be diluted.

The reverse stock split will affect all of our stockholders uniformly and will not change the proportionate equity interests of our stockholders, nor will the respective voting rights and other rights of stockholders be altered, except for possible changes due to the treatment of fractional shares resulting from the reverse split. As described below, stockholders holding fractional shares will be entitled to cash payments in lieu of such fractional shares. Common stock issued and outstanding pursuant to the reverse stock split will remain fully paid and non-assessable. So long as there are more than 300 stockholders of record, we will continue to be subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended. However, due to the magnitude of the reverse stock split, it may also have the effect of increasing the possibility of terminating these reporting requirements if the number of record holders of our common stock substantially decreases thereafter.

LookSmart, Ltd. - Preliminary Proxy Statement - 2013 Annual Meeting - Subject to Completion

Cash Payment in Lieu of Fractional Shares

We will not issue fractional certificates for post-reverse stock split shares in connection with the reverse stock split. Stockholders who otherwise would be entitled to receive fractional shares because they hold of record immediately prior to the effective time of the reverse stock split a number of shares not evenly divisible according to the split ratio determined by the board), will be entitled, upon surrender to the exchange agent of certificate(s) representing such shares, to a cash payment in lieu thereof. The cash payment will equal the fraction to which the stockholder would otherwise be entitled multiplied by the average of the closing prices (as adjusted to reflect the reverse stock split) of our common stock, as reported in The Wall Street Journal, during the 10 consecutive trading days ending on the trading day immediately prior to the date on which the reverse stock split becomes effective as described below in the first paragraph under "Procedure for Effecting Reverse Stock Split and Exchange of Certificates." If such price is not available, the fractional share payment will be based on the average of the last bid and ask prices of our common stock on such days (as adjusted to reflect the reverse stock split) or other price determined by the board. The ownership of a fractional interest will not give the holder thereof any voting, dividend or other rights except to receive payment therefor as described herein.

Stockholders should be aware that, under the escheat laws of the various jurisdictions where stockholders reside, sums due for fractional interests that are not timely claimed after the effective time may be required to be paid to the designated agent for each such jurisdiction. Thereafter, stockholders otherwise entitled to receive such funds may have to seek to obtain them directly from the state to which they were paid.

Accounting Matters

The reverse stock split will not affect the total amount of stockholders' equity on our balance sheet. However, because the par value of our common stock will remain unchanged, the components that make up total stockholders' equity will change by offsetting amounts. As a result of the reverse stock split, the stated capital component will be reduced to an amount according to the split ratio determined by the board), after giving effect to the cash payments in lieu of fractional shares described above, and the additional paid-in capital component will be increased by the amount by which the stated capital is reduced. The per share net loss and net book value per share of our common stock will be increased as a result of the reverse stock split because there will be fewer shares of our common stock outstanding. All historic share and per share amounts in our financial statements and related footnotes will be adjusted accordingly for the reverse stock split.

Potential Anti-Takeover Effects

If the Proposed Charter Amendments are approved by our stockholders and the reverse stock split is implemented, the increased proportion of unissued authorized shares to issued shares could, under certain circumstances, have an anti-takeover affect. These authorized but unissued shares could be used by the Company to oppose a hostile takeover attempt or to delay or prevent a change of control or changes in or removal of our board of directors, including a transaction that may be favored by a majority of our stockholders or in which our stockholders might receive a premium for their shares over then-current market prices or benefit in some other manner. For example, without further stockholder approval, our board of directors could issue and sell shares thereby diluting the stock ownership of a person seeking to effect a change in the composition of our board of directors or to propose or complete a tender offer or business combination involving us and potentially strategically placing shares with purchasers who would oppose such a change in our board or such a transaction. Although the increased proportion of unissued authorized shares to issued shares could, under certain circumstances, have an anti-takeover effect, the reverse stock split is not being proposed in response to any effort of which we are aware to accumulate the shares of our common stock or obtain control of us, nor is it part of a plan by our management to recommend a series of similar amendments to our board of directors and stockholders.

Further, our certificate of incorporation and bylaws contain provisions that may make it difficult for others to acquire, or may discourage others from attempting to acquire, control of the Company. These provisions could also limit the price that investors might be willing to pay in the future for shares of the common stock. For example, our certificate of incorporation and bylaws:

LookSmart, Ltd. - Preliminary Proxy Statement - 2013 Annual Meeting - Subject to Completion

In addition, the Company must comply with Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder, unless: prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; upon completion of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or on or subsequent to that date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.

Our board of directors does not intend to use the reverse stock split as a part of or first step in a "going private" transaction pursuant to Rule 13e-3 under the Securities Exchange Act of 1934, as amended.

Procedure for Effecting Reverse Stock Split and Exchange of Stock Certificates

If our stockholders approve the Proposed Charter Amendments and the board of directors determines that a reverse stock split continues to be in the best interests of the Company and its stockholders, the board will determine the split ratio to be implemented, and we will file the Proposed Charter Amendment reflecting that ratio with the Secretary of State of the State of Delaware.

The reverse stock split will become effective as of 5:00 p.m. eastern time on the date of such filing, which time on such date will be referred to as the "effective time." Except as described above  under "Cash Payment in Lieu of Fractional Shares," at the effective time, the applicable number of shares (corresponding to the split ratio determined by the board) of common stock issued and outstanding immediately prior to the effective time will, automatically and without any further action on the part of our stockholders, be combined into and become one share of common stock, and each certificate which, immediately prior to the effective time represented pre-reverse stock split shares, will be deemed for all corporate purposes to evidence ownership of post-reverse stock split shares.

Our transfer agent will act as exchange agent for purposes of implementing the exchange of stock certificates, and is referred to as the "exchange agent." As soon as practicable after the effective time, a letter of transmittal will be sent to stockholders of record as of the effective time for purposes of surrendering to the exchange agent certificates representing pre-reverse stock split shares in exchange for certificates representing post-reverse stock split shares in accordance with the procedures set forth in the letter of transmittal. No new certificates will be issued to a stockholder until such stockholder has surrendered such stockholder's outstanding certificate(s), together with the properly completed and executed letter of transmittal, to the exchange agent. From and after the effective time, any certificates formerly representing pre-reverse stock split shares which are submitted for transfer, whether pursuant to a sale, other disposition or otherwise, will be exchanged for certificates representing post-reverse stock split shares. Stockholders who do not have stock certificates for surrender and exchange will have their accounts automatically adjusted in order to reflect the number of shares of common stock they hold as a consequence of the reverse stock split. STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY CERTIFICATE(S) UNTIL REQUESTED TO DO SO.

LookSmart, Ltd. - Preliminary Proxy Statement - 2013 Annual Meeting - Subject to Completion

Even if the stockholders approve a reverse stock split, the Company reserves the right not to effect the reverse stock split if in the opinion of the board of directors it would not be in the best interests of the Company and its stockholders.

No Appraisal Rights

Under the Delaware General Corporation Law, stockholders will not be entitled to exercise appraisal rights in connection with the reverse stock split, and the Company will not independently provide stockholders with any such right.

Certain United States Federal Income Tax Consequences

The following is a summary of certain United States federal income tax consequences of the reverse stock split generally applicable to beneficial holders of shares of our common stock. This summary addresses only such stockholders who hold their pre-reverse stock split shares as capital assets and will hold the post-reverse stock split shares as capital assets. This discussion does not address all United States federal income tax considerations that may be relevant to particular stockholders in light of their individual circumstances or to stockholders that are subject to special rules, such as financial institutions, tax-exempt organizations, insurance companies, dealers in securities, and foreign stockholders. The following summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, applicable Treasury Regulations thereunder, judicial decisions and current administrative rulings, as of the date hereof, all of which are subject to change, possibly on a retroactive basis. Tax consequences under state, local, foreign, and other laws are not addressed herein. Each stockholder should consult its tax advisor as to the particular facts and circumstances which may be unique to such stockholder and also as to any estate, gift, state, local or foreign tax considerations arising out of the reverse stock split.

No gain or loss will be recognized by a stockholder upon such stockholder's exchange of pre-reverse stock split shares for post-reverse stock split shares pursuant to the reverse stock split, except to the extent of cash, if any, received in lieu of fractional shares. The aggregate tax basis of the post-reverse stock split shares received in the reverse stock split, including any fractional share deemed to have been received, will be equal to the aggregate tax basis of the pre-reverse stock split shares exchanged therefor, and the holding period of the post-reverse stock split shares will include the holding period of the pre-reverse stock split shares.

A holder of pre-reverse stock split shares that receives cash in lieu of a fractional share of post-reverse stock split shares should generally be treated as having received such fractional share pursuant to the reverse stock split and then as having exchanged such fractional share for cash in a redemption by the Company. The amount of any gain or loss should be equal to the difference between the ratable portion of the tax basis of the pre-reverse stock split shares exchanged in the reverse stock split that is allocated to such fractional share and the cash received in lieu thereof. In general, any such gain or loss will constitute long-term capital gain or loss if the holder's holding period for such pre-reverse stock split shares exceeds one year at the time of the reverse stock split. Deductibility of capital losses by holders is subject to limitations.

The board recommends a vote FOR Proposal 2.