SEC Lifts 80 Year Old Ban for Hedge Fund to Advertise. Hedge funds and other companies seeking private investments will be allowed to advertise publicly for funding under a rule approved on Wednesday by the U.S. Securities and Exchange Commission.
The rule, which passed by a 4-1 vote, is the first one mandated by last year’s Jumpstart Our Business Startups Act to be completed by the SEC. A deadline for the regulation set by Congress lapsed more than a year ago.
U.S. regulators lifted an 80-year-old ban on advertising by hedge funds, private equity firms and other companies, paving the way for asset managers to reach a new swath of investors through television and the Internet.
The rule will ease 80-year-old advertising restrictions intended to help ensure small investors aren’t lured into taking inappropriate risks. Under the measure, startups and other small companies would also be able to use advertising to raise unlimited amounts of money.
The rule affects how companies raise money through private offerings, which are exempt from requirements to publicly report financial statements. Private offers are restricted to investors with a net worth of at least $1 million excluding their primary residence, who are considered better positioned to take the risks of investing with less information.
“It changes the whole paradigm of who you can talk to,” said Brian J. Lane, a former division director at the SEC and now a partner at Gibson, Dunn & Crutcher LLP in Washington. “Hedge funds will benefit because they have the most restrictions on their ability to communicate more broadly about different funds coming to market.”
Companies raised $899 billion through private offers last year, compared with $228 billion through registered sales of stock and $976 billion through sales of public debt, according to the SEC. Firms raising capital through private offers decide what information to share with investors.
“By allowing issuers to solicit to a broader group of potential investors, the SEC has today showed its commitment to democratizing the investing process and putting an end to yesterday’s ’old boy’ investor networks,” said Barry Silbert, founder and chief executive of SecondMarket Inc. a marketplace for private shares.
State securities regulators say private offers were the most common product leading to enforcement actions in 2011. The North American Securities Administrators Association protested the SEC’s plan for lifting the advertising ban after it was proposed in August. The state regulators said the SEC’s plan failed to provide guidance to companies about appropriate advertising and didn’t include any investor protections.
The rule proved controversial at the five-member commission. Democratic Commissioner Luis A. Aguilar, who voted against the change, said it leaves investors unprotected against a greater risk of fraud.
“Without common-sense protections, general solicitation will prove be a great boon to the fraudster,” Aguilar said in a statement prepared for today’s meeting. “Experience tells us that this will lead to economic disaster for many investors.”
Fellow Democratic Commissioner Elisse B. Walter voted for the rule, saying the SEC will scrutinize how advertising is used and will pursue additional investor protections in a separate process.
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