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Buy directly into a tiny, unsung company's do-it-yourself Internet offering, on the other hand, and you've got a genuine, undiluted chance of surfing in front of a wave of growth that other investors--including the pros--haven't spotted. Needless to say, the risks would be correspondingly high. To pick the gems out of what will likely be a field made up predominantly of losers, small investors will have to do what angels do today: apply careful analysis and good instincts. Except you won't have to risk $50,000 or more, as you typically do today, to buy in at ground zero; $500 or so should do it. Welcome to the dawn of the micro-angel.

What can small companies hoping to raise money through an Internet DPO do to connect with potential micro-angels? Unfortunately, you probably won't learn much by examining the offerings out there today. I searched the Web using keywords and phrases like IPO, direct public offering, investors wanted, SCOR, and the like, and checked out dozens of small-business and capital-raising-related sites and bulletin boards. Of the 20 or so registered small-company stock offerings that I turned up, many appeared to be hybrids of one sort or another, depending at least as much on conventional techniques as on the Web to attract and convince investors.

The bottom line: the pure Internet DPO is largely unexplored territory. On the other hand, three years from now it will probably seem like old hat, with thousands of small companies competing for investors' attention. The ideal moment to strike will probably lie somewhere between now and then--and your guess is as good as anyone else's.

If there's a shadow hanging over the on-line DPO market, it's that being cast by securities fraud. Traditional stock offerings are heavily scrutinized by brokers and the SEC; typically, no one does due diligence on a DPO. DPOs that take place entirely on the Internet are ripe for con artists for the same reason that they are so appealing to legitimate companies: they are quick and cheap to set up. The SEC has charged 83 individuals and companies in the past year with Internet securities fraud, 26 of them for hawking entirely fictitious deals. Two years ago a company called Interactive Products and Services (IPS) Inc. rolled out a DPO to develop WebTV products; the offering was listed entirely on the Internet. IPS pulled in about $200,000 from small investors before California officials shut the operation down as a scam and sent its CEO to jail. Not surprisingly, con artists have figured out the kind of leverage they can achieve via the Net. In my search for offerings, I came across hundreds of bulletin-board investment solicitations in almost comically fishy-sounding ventures ranging from gold mines to magazines for "exotic models." But only the most naïve investors would be taken in by those sorts of come-ons. On the other hand, what to make of a company like Fonecash.com? Listed on Direct Stock Market (DSM), a Web site that specializes in listing DPOs and private placements, as a developer of a credit-card-transaction-processing device, Fonecash.com is floating a $990,000 DPO. The Fonecash.com Web site consists of an "under construction" notice, and the company had not returned phone calls by press time. Another DSM-listed company, Specialized Autocore Services Inc., also failed to respond to a request for information, and the phone number of a third company on the site, the Gourmet Source Inc., yielded a "no longer in service" message. Investors aren't likely to throw their money into an operation that doesn't even answer its phone.

In mid-1996, Ed Palmer decided to run a little test, putting up on the SolarAttic Web site the prospectus from his 1994 stock offering. Sure enough, he started getting E-mail requests for more information. By the end of 1997, his new offering was in place on the site.

SolarAttic now had a better picture to present to potential investors. The company's sales-growth rate was close to 80% and accelerating hard. A pool dealer in Arizona signed on as the first official SolarAttic regional dealer.

But once again Palmer found himself facing off against state regulators. The offering met with relatively little resistance in Connecticut, New Jersey, and Rhode Island. Palmer also painlessly tacked on Delaware, Arizona, and Colorado because those states require almost no paperwork, provided that a company is going after only a limited number of accredited investors. But Wisconsin, representing seven midwestern states that allowed pooled registration, dictated that a minimum amount of money be raised. The funds had to go into escrow until the minimum was met; if not, the money had to be returned to investors. California refused to accept the filing as a SCOR offering, instead requiring that Palmer fill out a long questionnaire that addressed the same information. The Nebraska Department of Banking and Finance sent Palmer a letter threatening criminal prosecution for violating a state law against unregistered solicitation of funds because of the Web site, even though the site clearly stated that Nebraska residents were not eligible. But it was Minnesota regulators who again seemed to set out to prove themselves the pit bulls of the DPO world, demanding that the company set up an "independent, disinterested" board of directors and even issuing a stop order against the offering.

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David H. Freedman

A Boston-based contributing editor, Freedman is the co-author of A Perfect Mess, which examines the useful role of disorder in daily life, business, and science. His other books include Corps Business: The 30 Management Principles of the U.S. Marines; At Large: The Strange Case of the World's Biggest Internet Invasion (co-authored with Charles C. Mann); and Brainmakers: How Scientists are Moving Beyond Computers to Create a Rival to the Human Brain.

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