Options in Public Offerings

The Securities and Exchange Commission gives the entrepreneur three ways to sell stock to the public without the huge expense and hassle of an ordinary public offering, but none is easy to do.

The first, known as a Regulation A offering, allows you to raise as much as $5 million by selling stock to any number of investors, sophisticated or not.

The second, known as a Rule 504 offering, allows you to sell $1 million in stock to any number of investors, also irrespective of their sophistication.

The third, known as a Rule 505 offering, allows you to sell $5 million in stock to accredited investors only--that is, to sophisticated investors as defined by the SEC.

In none of these cases must you register your prospectus with the SEC; instead, you must follow filing rules that differ from state to state. You must also follow strict rules governing what you must disclose to your investors and in what form, along with other rules governing the manner in which you may solicit investors no matter what their stripe.

If this sounds complicated, it is. Nothing about doing a direct public offering is easy, and no entrepreneur should attempt it without advice from an expert in securities law--for two reasons:

* There are as many punctilios in securities law as there are fleas on a cur.

* You can go to jail if you don’t follow them.

“There’s a euphoria about doing business on the Internet these days, and it seems counterintuitive to find that you can’t sell stock on the Internet as easily as you can sell books,” said Tim Bruinsma, a partner in the Los Angeles law firm Fulbright & Jaworski who specializes in international business law.

“But the securities laws of the federal and state governments apply to any offering of corporate securities, and you have to follow them. You can take advantage of the Internet, but you can’t ignore the restrictions in the law. Otherwise, you may pay a heavy price.”