Shackles drop off fundraising for startups. Should we worry?

Wed Sep 25, 2013 7:05pm EDT
 
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By Sarah McBride

SAN FRANCISCO (Reuters) - Entrepreneur Nicole O'Rourke has a novel idea for raising cash that would have been illegal until this week: smacking a "fund me" sticker on every bottle or can of hair products from her start-up business, Rock Your Hair.

O'Rourke is among the first to take advantage of the lifting of a years-long ban, mandated by the 1933 Securities Act, on using advertising to find investors in private companies. Intended originally to prevent opportunists from targeting the gullible, it has long been considered a bedrock protection against scams. Lifting it, with some protections, should help startups and thus boost the overall economy, proponents say.

Scores of websites have sprung up to connect budding financiers with struggling entrepreneurs who are eager to tap new sources of cash and close funding rounds far more speedily than under the traditional venture model. There are now dozens of sites with all sorts of business models, ranging from charging companies to create listings to taking a cut of an investor's eventual profits.

While many have been around for months, in some cases years, they could not highlight details about the deals on their sites until Monday. Before then, potential investors had to be registered on the site as accredited investors -- those with net worth, not including their homes, of $1 million or more-- to learn about the start-ups seeking funding.

"Public Fundraising. It's here. Tell the world you're raising money," trumpets the AngelList web site. On Monday, it took the wraps off a new type of investment vehicle, a syndicate, where one angel investor - typically an affluent person who provides capital for a startup - leads a group of accredited investors to back a company in a type of minifund.

"General solicitation has arrived!" reads the text at the top of the Rockthepost home page, which lower down features an endorsement from Barbara Corcoran, an investor who is also a regular guest on the start-up show Shark Tank.

The relaxation of the ban, however, may not work out so well for thousands of investors who could be drawn into companies without understanding the hazards.

"It's an area that has a lot of potential for misuse and fraud," warned Daniel Carlson, a San Diego-based securities-fraud lawyer.   Continued...

 
The seal of the U.S. Securities and Exchange Commission (SEC) hangs on the wall at their headquarters in Washington, in this June 24, 2011 file photo. REUTERS/Jonathan Ernst/Files