By Michael J. Weiner mweiner@mlg.com

"How do I raise the money I need to properly finance my business?" This question is on the short list of those entrepreneurs ask their advisors when their company is in its formative stages or as their business expands. Early-stage companies in search of financing are not in a position to undertake a task like a registered public offering of securities. This is due to, among other things, the company's short operating history and the cost involved in completing a public offering. Therefore, companies typically obtain equity financing by conducting a private offering or a "private placement" of the company's securities. A private placement is an offering that meets certain criteria set by the Securities & Exchange Commission and is therefore exempt from state and federal registration requirements (although, depending on the available exemption, a company may still need to comply with certain regulations before commencing a private offering). The exemption from the registration requirements, it should be noted, is limited to the initial sale of securities by the company. Any subsequent resale of the securities must be registered or there must be another exemption available.

Traditionally, conducting a private placement involved the retention by a company of an investment banker or placement agent to help find potential investors. Today, companies that want to conduct a private placement have a new option, the Internet. While it may seem somewhat counter-intuitive to conduct a "private" offering over the Internet, in 1996 the SEC approved the use of a Web site to locate investors that meet certain suitability standards and to permit them to participate in non-public offerings of securities. A quick search on the Internet turns up numerous companies that currently provide this type of service (VentureHighway.com, E*Offering, rule506.com and INVbank, to name a few).

The services offered to companies interested in using these Web sites varies. Some sites act as a matching service and simply obtain a questionnaire and business plan from a subscribing company. The executive summary of the company's business plan is then posted on the Web site and lists of interested investors are provided to the company. This means that an investor or company using one of these Web sites must conduct all of their own due diligence on the other party. Other sites provide more comprehensive services and may have a team of investment bankers and other professional advisors do everything from conduct due diligence investigations on the company to determine the structure of the offering. Fees for the services provided vary depending upon the type of service a company needs. Companies with these Web sites may charge a flat fee plus a small percentage of any proceeds raised for simple matching services and may receive compensation of up to 10% of the proceeds raised by a company, equity in the company and warrants to purchase stock in the company at a future time for investment banking services.

Web sites also provide investors with access to early-stage companies in search of financing. Because securities purchased in a private placement are high risk, illiquid investments, an investor must have the ability to hold onto the securities for a long period of time until they can be sold (which may require holding the securities until the company completes an initial public offering.) Because of the high risk involved in this type of investment, Web sites involved in private placements must ensure that only certain types of investors have access to the private placement information.

A potential investor visiting a Web site is invited to complete a questionnaire that is used to determine if the investor qualifies as an "accredited investor." Generally, an accredited investor is an individual with a net worth of at least $1 million, or one that has in excess of $200,000 annual income individually or $300,000 annual income jointly with a spouse in each of the two most recent years and reasonably expects to reach that level in the current year. Once an investor qualifies as an accredited investor, he is given a secure password that he can use to gain access to brief descriptions of private offerings posted on the Web site. In many cases, an investor can also set up a profile to enable him to receive information electronically if companies fitting the profile conduct an offering.

If an investor expresses interest in participating in a specific offering, the Web site will provide contact information to the company conducting the offering. Generally, the company and the investor will then work out the terms of the investment between themselves.

While the Web sites referred to offer companies an easier way to gain access to a large pool of potential investors and allow investors to gain access to investment opportunities they probably would not have seen otherwise, it is important to note that the requirements of the securities laws governing private offerings have not been relaxed. Federal and state securities laws, including civil liability and anti-fraud provisions are applied in the same manner to information delivered over the Internet as to information delivered in paper form. Therefore, companies and investors should consult with their legal and financial advisors prior to participating in the offer or purchase of securities over the Internet.