SEC opens new crowd funding options for start-up businesses
LITTLE ROCK (KATV) - The Securities and Exchange Commission Wednesday changed a rule so that start-up businesses can now advertising directly to potential investors.
Before the ruling, it was illegal to put an ad in the newspaper or on TV looking for investors but websites like Kickstarter has made regulators more comfortable with "crowd funding."
"I met with a lot of bankers actually trying to get business loans and it just wasn't happening," said Tyson Allen of Grampa's Southern Catfish. "They said, 'Somebody at your age that just got out of college doesn't really have any capital or anything. We just can't really help you, bud'."
With no banks biting, Tyler did the only thing left to do - he found an investor.
"That was really exciting just to hear that somebody really believed in me and they were like, 'This is what we're going to do. We want to help you and we're excited to see you succeed at your age'."
Most start-ups aren't so fortunate. Recently, sites like Kickstarter have allowed entrepreneurs to advertise to the masses for investment but they can only promise t-shirts or plaques in return. Until the SEC's Wednesday ruling, it was illegal to offer the masses a stake in the company. That's no longer the case.
Some say the change is a good thing, making it easier for small businesses to raise capital but one Arkansas expert warns it's more like an invitation to commit fraud.
"Worst case scenario is you're going to have people that lose money to the get-rich-quick schemes," said Heath Abshure, an Arkansas securities commissioner.
Abshure said advertising to the masses means a lot of folks are going to get scammed and even legitimate startups could run into trouble. Salesmen over-promising results is securities fraud so if a first-time business owner gets too excited about access to a new source of capital and promises a product they won't actually be able to produce, they could get sued.
Bottom line: when these investment opportunities begin popping up online, be careful.