Hedge funds may go from soliciting individual investors to world wide advertising campaigns under a rule set for proposal by SEC.
The proposal is driven by a law that repealed a ban on marketing such investments to all but a select few investors, such as those accustomed to pumping cash into hedge funds. JOBS Act, signed into law by President Obama in April ended the ban as part of a wider effort to ease funding options for fledgling companies. The shift drew criticism from investor-protection groups and the mutual-fund industry, including the Washington-based Investment Company Institute, which have said that lifting the ban without restrictions may expose investors to misleading advertisements by some private funds.
The lift on the hedge fund advertising ban will educate a broader group about the type of private offerings available, said Steven Nadel, a partner at the law firm of Seward & Kissel LLP in New York who specializes in hedge funds and other alternative investments.
“The greatest threat of all to investors and one that is expected to grow as a result of the JOBS Act involves private offerings,” Jack Herstein, president of the North American Securities Administrators Association, said in a conference call with reporters last week.
In the past, securities laws allowed firms to market non- publicly traded securities only to so-called accredited investors that they were familiar with, usually meaning frequent, wealthy investors. The solicitation rules were designed to protect smaller retail investors from inappropriate risks. Even as future offerings are marketed to the general public, the new rule would still limit participants to those with more than $1 million in assets, excluding primary residences, or those earning more than $200,000 a year.
“These offerings are not for everyone and carry a very high degree of risk,” Lori Schock, the SEC director of investor education and advocacy, said in a June speech. “For every successful venture, there are more numerous failed ventures.”
Private offerings are the No. 1 fraud leading to enforcement actions and investigations, according to NASAA. The number of cases involving these types of investments jumped to 410 last year, according to preliminary data from the organization of state securities regulators. 60 percent increase from 2010.
“There’s plenty of wealthy Americans who may not be super sophisticated when it comes to investing in alternatives,” Nadel said in an interview before the meeting. “It will create more knowledge, more transparency, more understanding of the entire alternative industry.”
The SEC missed the law’s July implementation deadline, and the public comment period will delay new hedge fund advertising and marketing practices even further.
“The 90-day deadline did not provide a realistic time frame for the drafting of a new rule, the preparation of an accompanying economic analysis, the proper review by the Commission, and an opportunity for public input,” John Nester, an SEC spokesman, said in a statement.
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