(Bloomberg News) Hedge funds may go from soliciting individual investors behind closed doors to conducting wide advertising campaigns without restriction under a rule proposed yesterday by the U.S. Securities and Exchange Commission.
SEC commissioners voted 4-1 to invite public comment on a proposal for how to end decades of limits on the pursuit of investors by private funds and startups.
The Jumpstart Our Business Startups Act, signed into law by President Barack Obama in April, ended the ban as part of a wider effort to expand 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.
In the past, securities laws allowed firms to market non-publicly traded securities only to so-called accredited investors with whom they have an existing relationship, usually meaning frequent, wealthy investors. The solicitation rules were designed to protect retail investors from inappropriate risks.
Even as future offerings are marketed to the general public, the new rule would limit participants to those with more than $1 million in assets, excluding primary residences, or those earning more than $200,000 a year. The SEC's proposal doesn't include restrictions for how offers are advertised, nor does it establish a system for verifying accredited investors -- only that firms must take "reasonable steps" to check.
"This is a huge disappointment," Barbara Roper, director of investor protection for the Washington-based Consumer Federation of America, said in a phone interview after the meeting. "It appears that none of the investor protections that we or others have advocated are included in this proposal."
Luis Aguilar, a Democratic SEC commissioner, dissented, citing his concerns about investor vulnerability.