08:57 PM EDT on Wednesday, August 4, 2004

By MICHAEL LIEDTKE
Associated Press

SAN FRANCISCO Google Inc. may have illegally issued more than 23 million shares of its stock to hundreds of employees and consultants, injecting an unexpected legal risk into the online search engine leader's highly anticipated IPO.

The Mountain View-based company disclosed the possible violations Wednesday in a prospectus offering to buy back the affected shares and outstanding stock options for a total of $25.9 million, including interest payments.

With $549 million in cash as of June 30, Google can easily afford to make amends.

But it's uncertain whether the gesture will satisfy everyone affected by potential bureaucratic blunders that occurred from September 2001 through June 2004.

During that time, the company says it neglected to register 23.2 million shares of common stock and 5.6 million outstanding stock options with securities regulators. The oversights might have broken federal and state laws, according to Wednesday's filing. The affected common stock is owned by 1,105 current and former employees, as well as company consultants.

Google warned that its buyback, or "recission," offer may be rejected by some people who prefer to sue the company. Google believes it faces potential liabilities in 18 states and the District of Columbia, as well as federal court.

It's unclear whether Wednesday's twist will affect the timing of Google's initial public offering - a deal expected to raise up to $3.3 billion, with roughly half of the money flowing into the company's bank accounts. The rest of the money will be split up among Google's top executives and early investors who plan to sell stock in an IPO carrying a target price of $108 to $135 per share.

In Wednesday's filing, Google said it planned to complete the IPO "as soon as practicable," but didn't elaborate. Federal securities law prohibits Google from making public statements about the IPO beyond the information contained it SEC filings. The company's latest filing indicated the recission offer will expire sometime next month.

Google is currently letting prospective bidders register for an upcoming auction of 24.6 million IPO shares at www.ipo.google.com .

Once the registration period closes — something that could happen later this week — qualified investors can bid to buy a minimum of five shares through one of 28 underwriters participating in the IPO. If the auction is completed in a few days, Google's shares could begin trading on the Nasdaq Stock Market as early as next week.

A successful IPO might make the recission offer a moot point. Wednesday's filing said the stockholders that reject or don't respond to the recission offer will have their shares and option automatically registered under federal securities law after the IPO is completed. The shares then would become tradable after the recission offer expires next month.

The offer applies to 1,105 current and former employees, as well as company consultants, who own the affected common stock. The options, carrying exercise prices ranging from 30 cents to $80 per share, are held by 301 people.