Guess they are just getting around to it. Shy of banner ads, advertising has begun. Finally more interesting spam – the last offer was from some “random” claiming to be responsible for hidden and frozen bank accounts belonging to Momar Kadafi – at least now I can read about time machines that need my financial support. – PM ;)
WASHINGTON (MarketWatch) — A commissioner on the Securities and Exchange Commission warned Thursday that allowing hedge funds to publicly advertise could lead to an increase in fraud.
At issue is a U.S. Securities and Exchange Commission proposal introduced in August to relax rules that have kept hedge funds, private-equity firms and small companies from soliciting to the general public for decades. The proposal is going through a comment period, but hedge-fund advertising is likely to be implemented in 2013.
“If allowing general solicitation results in increased incidence of fraud or sale of securities to investors that don’t have the sophistication to understand the risks and merits of a particular investment we will have failed not only investors but small businesses as well,” said Elisse Walter, a Democratic commissioner on the SEC, at a conference Thursday about small business capital formation held at the agency.
However, Walter did not say she would seek to block the rule from being adopted or seek to propose a new rule. Instead, Walter said she hopes the agency and participants at the conference will consider various safeguards, including whether it makes sense to place some limitations on the forms of solicitation.
“I feel strongly that we should take those potential consequences seriously,” she said. “We must be vigilant about the potential consequences, particularly the unintended consequences of a change like this and consider ways to mitigate potential harms to investors while preserving the rule’s intended effects.”
The proposal is mandated by the JOBS Act, legislation approved by Congress in April.
Some observers commenting on the proposal have raised concerns that removing the advertising ban would result in more fraud against duped investors. Proponents acknowledge that it allows hedge funds, private equity firms and angel investors to advertise but only members of the public who can buy will be “accredited investors.” An accredited investor must have a net worth of $1 million or more, or income of more than $200,000.
Walter added that participants should consider whether to change the definition of “accredited investor” or provide specific measurements for companies to verify accredited investors.
“Many comments including ones from the small business community strongly support ending the ban as a step towards facilitating capital raising. Other comments have focused on potential consequences to investors of eliminating the ban,” Walter said.
Jean Peters, director of Golden Seeds, an angel investor network, said that only a small number of accredited investors participate as angel investors, adding that she hopes the solicitation rules will encourage participation.
Peters said the rules should encourage disciplined angel group investing in small businesses. She said an Angel Capital Association survey found that investors would withhold investors if they find a cumbersome, burdensome, verification process.
“That capital comes form our pocketbooks,” she said.
Meredith Cross, director of the SEC’s division of corporate finance, told participants that the agency is sifting through the comments on the measure and were hoping to get a recommendation to the agency’s commissioners to consider that “balances all the competing interests” as quickly as possible.