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Someday soon you'll see a new kind of advertising on TV and the Internet. A federal law went into effect today allowing private companies to solicit investors for the first time. The new rules are supposed to make it easier for startup companies to raise money. But NPR's Jim Zarroli reports they could also generate more fraud.
JIM ZARROLI, BYLINE: Business owners who want to raise money but can't get bank loans typically have few good options. The federal government has long-barred them from publicly soliciting most investors. And that means they can be pretty much restricted to hitting up friends and family.
Thomas Martin is a partner at the law firm Dorsey and Whitney. He represents a lot of startup companies.
THOMAS MARTIN: The audience that you could reach was very limited. And those limitations made it difficult to raise money.
ZARROLI: In the wake of the 2008 financial crisis, credit grew even scarcer for small businesses, and so last year Congress decided to loosen some of the rules that govern investor solicitation. The changes take effect today. And they're being called some of the most significant rule changes by the Securities and Exchange Commission in decades.
DAVID WEILD: It's a watershed event.
ZARROLI: David Weild is a former vice chairman at the NASDAQ stock exchange. He says private companies, even risky investment vehicles such as hedge funds, are now able to raise money by appealing to a lot more investors directly and they can do it by running ads in print media, TV and radio, and the Internet.
WEILD: You will see, I believe, television commercials on CNBC, on Bloomberg. I mean, there will be, I think, a very considerable advertising boom.
ZARROLI: The rule changes will open up a big, new floodgate of money for startups and other companies that don't want to sell stock in the public market. And proponents say that could help stimulate the economy.
There is a downside: More people looking for money means more potential for fraud. Again, attorney Thomas Martin.
MARTIN: There's always been some degree of fraud. There's always been some number of individuals that are willing to sell things that are simply nonexistent. Now it's difficult for regulators to tell in advance who they are. And it opens up the floodgates as to the number of those that might be advertised over general media.
ZARROLI: The SEC has dealt with this risk by issuing rules meant to protect investors. Companies can now run commercials looking for investors but before any money changes hands, they have to make sure the investor can afford to part with it. And to do that, they have to look into the investor's finances in a much more intrusive way, even checking out their tax returns. A lot of investors are none too happy about that. Don Kassel(ph) heads a large network of angel investors based in Southern California.
DON KASSEL: We are now being asked to provide personal financial information to the entrepreneur directly, which is a little bit like having to provide your personal financial statement to a restaurant in order to order the meal and by the dinner.
ZARROLI: Kassel says a lot of investors will opt out of the new rules, choosing not to put money in companies that air advertising for investors. But he also says that for a lot of business owners and investors, the rule changes are probably a good thing. Kassel says there's a big unmet need for capital among small and medium size businesses. And as of today, many of them have a new way of getting it.
Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.
