Vapor trails: a hot deal for an electronic-cigarette seller shows where there's no smoke, there's fire.

• Author: Otterbourg, Ken
• Position: COVER STORY

Last April 25, blu ecigs had big news to share with its 30,000 Facebook fans: It had agreed to be bought by Lorillard Corp. for an eye-popping $135 million. The reaction was swift, and it wasn't all congratulatory. Complaints were posted. One commenter wrote, "I feel dirty ... it's like buying a bible from a satanist or child safety equipment from a registered pedophile." Though the companies are within 100 miles of each other--blu is based in Charlotte; Lorillard's headquarters and factory are in Greensboro--in many ways they are a world apart. Started in 2008, blu sells electronic cigarettes. Lorillard, founded in 1760, is a bastion of Big Tobacco, its Newport brand the nation's top menthol cigarette. Another commenter on the Facebook page put it this way: "It was good for y'all to get that money from the one industry everyone who ever bought a blu was trying to escape."

Members of blu's social-media team worked the site hard, responding to criticism and pledging that nothing would change. It was still business as usual, they said, but, of course, that wasn't exactly the case. Since then, the snarkiness of blu's home page has become more muted. There are fewer posts mocking smokers and their dirty, ash-strewing habit. And all the posts lambasting the company? They've been removed.

Change is sweeping through the e-cigarette business as it moves from sidestream to mainstream. Sales are soaring, estimated at close to $300 million in 2012. But the boom is bringing growing pains. For an industry that was fiercely and proudly independent of Big Tobacco, Lorillard's entry is a sign that the grown-ups have joined the game and are likely to reshape the playing field to their needs. This all comes as the U.S. Food and Drug Administration is starting to develop regulations on e-cigarettes that will help determine how the products are sold and marketed and how they compete with the real deal. There's hype, and there's hope, and everything in between. "As far as the industry is concerned, it's a pretty big mess right now," says Ray Story, the president of the Tobacco Vapor Electronic Cigarette Association, a trade group based in Alpharetta, Ga. "It's the wild, wild West. This is a fantastic industry that can change humanity. My biggest issue is to make sure we have some kind of regulations we can work with and parameters of how we operate."

The tobacco industry has been chasing a smokeless cigarette for decades (Remember James Garner as RJR Nabisco Corp. CEO Ross Johnson puffing one in the HBO movie version of Barbarians at the Gate?) but had little to show for its efforts until eight years ago. That's when Hong Kong-based Ruyan Group (Holdings) Ltd. released the first versions of the electronic cigarette. The components themselves are not groundbreaking, but advancements in miniaturization--think of the electronic jingle in a greeting card--allowed all the parts to be crammed inside a small tube that could be cradled between your middle and index fingers. Inside the tube are a cartridge, an atomizer, a battery and a small light. When you suck on the mouthpiece, you activate the battery, which powers the atomizer and turns on the light. The atomizer heats and vaporizes the liquid in the cartridge, which includes nicotine, flavorings and some form of glycerin.

It's not smoking--there's no smoke. The term users have coined is "vaping." E-cigarettes offer a reasonable approximation for a habit that physiologically is built on the absorption of nicotine but really encompasses a much wider range of senses. These products feel good in your hand. The light simulates the lit tip of a cigarette. The nicotine bites a bit in the back of the throat, and the glycerin upon exhale condenses into a vapor that hangs around just long enough to be seen. With practice, you can even blow a vape ring.

The first e-cigarettes that made it to the U.S. were a work in progress. The batteries could be iffy. The cartridges sometimes leaked. The flavorings could be harsh and inconsistent. But there was a core of smokers who were ready to give them a try, and pretty soon a sprawling online community developed that was dedicated to sharing their opinions of the different products and proclaiming their love of all things vaping. It's into this scrum that Jason Healy, blu's president, dove in 2008. His journey to being the future of Big Tobacco is both likely and unlikely. He grew up in Australia, where his dad was a morning radio personality in Brisbane. He first came to the United States to play basketball in high school, then returned home after a few years in college and went into promotions. From there, he helped run Funbox, an Australian company that developed and peddled adult content for cellphones. When he sold his stake in 2007, he looked to America and Charlotte (his wife is from Statesville) for a new venture.

What Healy, 38, says he saw in electronic cigarettes was opportunity. The industry was growing, but there were no truly established players. It was all being sorted out. His goal was to bring branding to the product and to raise its quality so it could move away from being a novelty. Healy and 11 other investors launched blu in May 2009, relying heavily on social media, giveaways and sponsorships of events to build an online brand before moving into the bricks-and-mortar end of the retail business. Its latest innovation is a signaling device in the pack that goes off when another blu user is close by. Blu now has 50 or so employees, most at its headquarters, where online orders are filled. Wholesale orders go through a warehouse in Atlanta. It also has third-party operations in China, where the devices are made. Sales leaped from $25 million in 2011 to $76 million. in 2012.

Healy dismisses...