Two years ago, Alfred H. Knief thought he had found a foolproof way to beat the high cost of borrowing from a bank. He wrote a letter to his 23 employees asking for loans, backed by 12%, three-day demand notes, to finance a new computer for his small, West Allis, Wis., Lincoln Contractors Supply Co. (see INC., April 1981, page 28).

Within a week, 17 of the 23 employees had taken the company president up on his offer, raising over $100,000. Knief's clever plan, however, had one catch: In Wisconsin, it was against the law.

A state securities regulation allows business owners to solicit funds from up to 15 people. Solicitations to more than that number require that the securities offered by the company be either registered or given a discretionary exemption order by the Wisconsin Commissioner of Securities. Federal securities law cuts off unregistered offerings at 35 investors, but nearly all the states have stricter regulations. Under the Uniform Securities Act, which has been adopted in 37 states, the liinit is 10 persons within a 12-month period.

Knief was familiar with the national regulations, but had no idea he was violating Wisconsin law. "I wasn't the only one who had no knowledge of the law," says Knief. After favorable press coverage of his financing innovation, Knief received supportive, congratulatory letters from Gov. Lee Dreyfus of Wisconsin and Sen. William Proxmire (D-Wis.).

But Knief faced fines of $5,000, five years' imprisonment, or both. Eventually he signed a consent order and was then granted a three-year renewable exemption to the rule. Knief may now solicit up to $400,000 from np to 35 investors before formally registering.