Business Opportunities Warning Issued
July 18, 1995
Securities officials at the Connecticut Department of Banking revealed today that they are working with the Federal Trade Commission (FTC) and 20 other states to alert the public to the increasing use of fraudulent, high-pressure telemarketing to pawn off worthless or overinflated business opportunities on unwary entrepreneurs. Lured by deceptive promises of independence and easy income, many would-be entrepreneurs are jumping into the arms of con artists who claim that they are not just selling a business but are putting people in business.
"In many cases, what they are telling investors couldn't be further from the truth," said State Banking Commissioner John P. Burke. "Business opportunity swindlers exaggerate how much money can be earned, lie about their ability to nail down prime locations, provide phony references, and fail to provide the marketing support and other follow-up assistance that they promise. All too often these unwary investors are cleaned out and left far worse off than when they started," Burke added, explaining that today his agency sanctioned a Maryland-based firm which failed to deliver on the goods it promised to a Connecticut investor.
Silver Shots, Inc. promotes table top quarter machines the company claims can be placed at restaurants, bars, convenience stores, pizza parlors or at similar business countertops, Burke said. Promotional material distributed by Silver Shots explains how the game is played: a player inserts a quarter in the machine and, while the coin ricochets through a series of pegs, the player attempts to catch the quarter with a device attached to the machine. If successful, the player is eligible to receive free goods or services from the merchant where the machine is located.
According to Burke, earlier this year, Silver Shots offered to sell a starter package to a Connecticut resident, assuring the investor that the company was an approved business opportunity in all 50 states. The investor sent $1,050 as down payment for the purchase of a Silver Shots distributorship. To date, the investor has not received any quarter machines nor has there been a refund of the down payment.
The investor contacted the Securities Division for help and was informed that Silver Shots was not registered as a business opportunity in Connecticut. Under the Connecticut Business Opportunity Investment Act, before any seller may even offer a business opportunity to the public within or from Connecticut, the seller must submit a registration application that includes a copy of the disclosure document it provides to prospective purchasers, financial statements for the seller, the risks involved, and copies of any contracts or sales brochures used to sell or promote its business ventures.
Since Silver Shots was unregistered and because it failed to disclose the financial risks associated with the quarter machine investment, Burke ordered the company to cease all business practices that violate Connecticut law and notified it of the department's intent to impose a fine that could exceed $10,000.
Burke emphasized that "Connecticut will not tolerate this kind of unlawful activity. Dishonest promoters should know that the department will seek penalties to the full extent of the law."
Business opportunities have received considerable attention in recent years, owing in large part to the changes in the traditional American job market. Always quick to seize on a new way to make an illicit buck, con artists are using fraudulent telemarketing operations to push overhyped or worthless small business deals on unsuspecting entrepreneurs -- individuals looking for a second income to make ends meet, or people who have lost jobs and have been unable to find work.
Legitimate business opportunity deals provide the entrepreneur a pre-packaged small business. Typical business opportunities involve vending machines, amusement games, pay telephones, and display racks for such items as greeting cards and CD ROM computer software. Ideally, the vending machine, display rack or other item is located in a high-traffic area, such as a mall, airport, or bowling alley. The operator is responsible for cleaning and restocking, and collecting the money. The promoter is responsible for providing the machines or racks, finding locations, relocating machines when necessary, and providing replacements.
Investigations show that business opportunity scams are most often promoted at trade shows and through small ads that appear in the classified sections of newspapers and magazines. Most of the ads promise big earnings, possibly on a part-time basis, promise that no selling or other experience is necessary, and urge the reader to call an "800" number for more information.
Burke said he is pleased that the Securities Division has been extremely proactive in being able to quell any apparent attempts by business opportunity promoters to skirt the registration process. Securities Division investigators have been making visits to trade shows to uncover business opportunity ventures which may be unregistered and the Securities Division staff routinely review ads in statewide newspapers that offer business opportunity deals. In most instances, when a promoter is contacted by the Securities Division, the business opportunity becomes registered, if necessary, or the company ceases to solicit Connecticut residents, Burke said. During the past two years, informal Securities Division intervention has successfully resulted in more than $160,000 being returned to Connecticut investors who had filed complaints against business opportunity promoters.
Nevertheless, Burke emphasized the importance of reminding consumers that they should be careful before investing their hard-earned money. Before you buy, be sure to thoroughly read the business opportunity disclosure document and contract. Carefully review the portions dealing with risks; the business experience of the company and directors; history of lawsuits, including those alleging fraud; fees to be paid and conditions under which fees and deposits will be returned; balance sheets for the three previous years; and substantiation of earnings claims. It's wise to consult with an attorney or accountant, preferably one with experience in this area, before forwarding a deposit to the business opportunity seller.
"Even the most experienced entrepreneurs never enter into an important business relationship without consulting a team of professional advisers," Burke said. "And, investors should remember, even if a business opportunity promoter complies with the laws of the state governing such deals, there is no guarantee that they'll make money," cautioned Burke.
One way to screen out bogus operators or to learn more about what your rights are in a business opportunity venture is to contact the banking department's Securities Division by calling (860) 240-8230 or in writing to 260 Constitution Plaza, Hartford, CT, 06103. In conjunction with the massive state and federal crackdown on business opportunity scams, the Securities Division is making available an Investor Alert on Business Opportunity Fraud which discusses examples of business opportunity scams and provides detailed information on how to avoid such swindles. To get a free copy contact the Securities Division.