U.S. securities regulators plan to meet next week to adopt rules that would lift a long-time ban prohibiting hedge funds and other firms from advertising for private placements to sophisticated investors.
The scheduling of the open meeting next Wednesday at the U.S. Securities and Exchange Commission signals that its new chair, Mary Jo White, believes she has enough votes to get the measure passed, following nearly a year of deadlock over the issue.
Lifting the ban on general solicitation is required by the 2012 Jumpstart Our Business Startups, or JOBS Act, a law that relaxes certain securities regulations to help small businesses raise capital and go public.
But the rule has languished at the SEC for nearly a year amid internal disagreements between Democratic and Republican commissioners.
The two Republicans, Troy Paredes and Daniel Gallagher, wanted the ban to be lifted immediately. Democrat Luis Aguilar had warned the rule left investors vulnerable to fraud and should be reproposed to include certain investor protection measures.
In an effort to reach a compromise, White added two other items to Wednesday's agenda that aim to address some of the investor protection concerns.
One measure would finalize a separate rule required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that would block felons and other lawbreakers from pitching private investment deals to unsophisticated customers.
Investor advocacy groups had urged the SEC to complete the "bad actor" rule before lifting the advertising ban, or else they said convicted felons could try to scam innocent investors.
A third item on Wednesday's agenda, meanwhile, proposes a raft of separate reforms that address some of Aguilar's concerns with lifting the ban so the SEC can better monitor the private securities market, one person familiar with the rule said.
For years now, state regulators and investor advocacy groups have complained about lax regulatory oversight in the private market.
A "safe harbor" known as Rule 506 of Regulation D grants a series of exemptions that let companies avoid registering their securities.
The rule requires the companies to notify regulators when they conduct private offerings. But advocates have complained those notices only get filed after the sale occurs and they contain very limited information.
Next week's proposal would require firms that engage in general solicitation for private placements to give regulators additional information about the nature of the advertising, the steps they took to verify that they were advertising only to sophisticated investors and what they plan to do with the proceeds of the sale, this person said.
In addition, it will call for companies that offer the private placements to include warning labels about risks and submit their advertising materials to regulators in advance, among other things, the person added.
About the Author
Mr. Gould practices in the Corporate & Securities area and is leader of Pillsbury’s Investment Funds & Investment Management practice team. He counsels clients involved in all aspects of the financial services industry. Mr. Gould represents US registered investment companies, hedge funds, offshore investment companies, investment advisers, retail and institutional broker-dealers, and municipal bond underwriters.