Hedge Funds Would Be Cleared to Solicit Average Investors Under SEC Proposal
Hedge funds may soon be able to solicit investments from average investors
through wide advertising campaigns, if a new rule proposed by the SEC
passes. The proposal, which comes out of The Jumpstart Our Business Startups
Act, would lift the current ban on general solicitation for private offerings
and allow firms to solicit investments via a variety of media, including
TV, the Internet, radio, billboards, and telemarketer calls.
Though advocates for lifting the ban say it will expand funding options
for start-ups, its overall effect (if passed) will be to decrease investor
protections that help prevent unscrupulous marketing practices and investment fraud.
Under current rules, financial firms are only allowed to market non-publically
traded securities to “accredited investors” with whom they have existing relationships. These rules were designed
to protect everyday investors from marketing materials and sales pitches
that promote exceptionally complicated and/or risky products, which the
average investor may not understand.
“I recognize that there are very real concerns about the potential
impact of lifting the ban on general solicitation,” said SEC Chairman
Mary Schapiro. “While I believe it will be incredibly important
for the commission to take a thorough look at the
private placement market in the future, I think at this point it is appropriate that we
undertake this more narrow mandate that Congress placed upon us.”
Schapiro’s recommendation to lift the ban, however, goes against
the warnings of the SEC’s own director of investor education and
advocacy: “These offerings [private funds and hedge funds] are not
for everyone and carry a very high degree of risk,” said the SEC’s
Lori Schock, in a June speech. “For every successful venture, there
are more numerous failed ventures.”
Unfortunately, she’s right.
Hedge funds and private offerings are risky and complicated.
They're also the number one investment products pushed by fraudsters
and con artists. And, there's no expectation for that to change.
“This is a huge disappointment,” Barbara Roper, director of
investor protection for the Washington-based Consumer Federation of America,
told Bloomberg reporters. “It appears that none of the investor protections that we or others
have advocated are included in this proposal … Unsophisticated
investors will be inundated with offers of inappropriate investments sold
through misleading advertisements. Fraud will surge in a market already
ripe with problems.”
Let’s hope the public comment period changes the Commissioners’ minds.