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Rule change cleared way, eased investing in start-ups.

Byline: EDWARD RUSSO The Register-Guard

For years, securities regulators have allowed the wealthy to invest in direct stock offerings of new, cash-hungry firms. Rich investors are financially savvy and can afford losses, regulators figured.

For those of more modest means, the chance to gamble - and lose - came only in the 1980s, after state and federal regulators made it easier for small companies to directly solicit people of all incomes.

The genesis for the changes came in the 1970s, when high interest rates made it hard for small firms to get financing, said Tom Stewart-Gordon, editor of a Dallas, Texas, newsletter on direct-to-investor offerings.

Congress responded in 1980 by telling the federal Securities and Exchange Commission to develop standards for small-stock offerings seeking $5 million or less. Many state securities regulators, plus the American Bar Association, backed the new approach.

Disclosure of risks lay at the heart of the new system, said Mike Liles, a Seattle attorney who in 1982 co-wrote a question-and-answer-style disclosure form that became standard for direct offerings in Oregon and nationwide.

The form gives financial information, including profits, losses and business strategy, in a way that is easy for financially unsophisticated people to grasp, Liles said. Regulators add boilerplate language about the risk of investing.

Officials stress that gaining state approval doesn't mean the state is recommending the stock.

"The state is in no way passing on the substance of the company," said Michael Hurwitz, a former Oregon securities examiner, now a lawyer with the U.S. Securities and Exchange Commission in Washington, D.C. "It is giving people an opportunity to buy the securities. It's an absence of a roadblock."

But critics say these warnings don't do enough to protect unsophisticated investors.

"How much of the information do they really understand?" said Ronald Gietter, a vice president at the Eugene brokerage office of Salomon Smith Barney. "I suspect that the buyer rarely understands the degree of risk they are getting into."

Scott Pope, a financial planner at Progressive Investment Management in Eugene, said direct stock offerings "prey" on the get-rich-quick mentality of Americans.

"In many cases, the odds in Vegas are better than they are investment in start-up corporations," he said.

In any event, Oregon and many other states now let small-scale investors buy stock directly from small start-up firms as long as they sign a form asserting that they have adequate assets and the ability to evaluate the offering.

Interest in these offerings grew in the late 1980s, with the development of the $1 million Small Corporate Offering Registration.

Oregon began allowing SCORs in 1992.

Nationwide, direct offerings reached a peak in the 1990s, rising from 56 in 1990 to a record 682 seven years later, Stewart-Gordon said. (The number of firms selling shares each year is less than those totals because many firms have simultaneous offerings in several states yet each filing is counted as a separate offering, Stewart-Gordon said.)

With the recent economic bust, direct offerings declined to 313 last year and probably won't top 50 this year, Stewart-Gordon said.

Some financial advisers say the public might be better off if they dropped to zero.

A good business idea usually can attract wealthy backers, so entrepreneurs with winning ideas avoid the direct-offering route and the tedious job of hawking small batches of shares, said Eugene investment adviser Gary Conley.

"Why is the money being raised" in a direct offering, Conley asked. "It indicates that it's too small for anybody to be interested in it. If it was a whiz-bang idea, there are a lot of people in this town that could write you checks for $100,000, $1 million or even $2 million."
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Title Annotation:Business
Publication:The Register-Guard (Eugene, OR)
Date:Dec 8, 2002
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