SEC set to ease 80-year-old ban on hedge-fund ads

Hedge funds and other companies seeking private investments would be freed to advertise publicly for funding under a rule set for a vote today by the U.S. Securities and Exchange Commission.

The rule, which is expected to pass because the commission rarely schedules votes that lack support for approval, would be the first one mandated by last year’s Jumpstart Our Business Startups Act to be completed by the SEC. A deadline for the regulation set by Congress lapsed more than a year ago.

The rule would ease 80 years of advertising restrictions that help ensure small investors aren’t lured into taking inappropriate risks. Under the new rule, startups and other small companies would also be able to use advertising to raise unlimited amounts of money.

“It changes the whole paradigm of who you can talk to,” said Brian J. Lane, a former division director at the SEC and now a partner at Gibson, Dunn & Crutcher LLP in Washington. “Hedge funds will benefit because they have the most restrictions on their ability to communicate more broadly about different funds coming to market.”

The rule affects how companies raise money through private offerings, which are exempt from requirements to publicly report financial statements. Private offers are restricted to wealthy investors, who are considered better positioned to understand the risks of investing with less information.

Raising Capital

Companies raised $899 billion through private offers last year, compared with $228 billion through registered sales of stock and $976 billion through sales of public debt, according to the SEC. Firms raising capital through private offers decide what information to share with investors.

State securities regulators say private offers were the most common product leading to enforcement actions in 2011. The North American Securities Administrators Association protested the SEC’s plan for lifting the advertising ban after it was proposed in August. The state regulators said the SEC’s plan failed to provide guidance to companies about appropriate advertising and didn’t include any investor protections.

The proposal also divided the five-member commission. Two Republican commissioners have said the proposed rule should be completed as written. Democratic Commissioner Luis A. Aguilar said in April that a rewrite is needed because last year’s proposal resulted from an “aggressive effort to exclude pro-investor initiatives,” while fellow Democrat Elisse B. Walter has also voiced concern that fraud risks would grow.

“Without common-sense protections, general solicitation will prove be a great boon to the fraudster,” Aguilar said in a statement prepared for today’s meeting. “Experience tells us that this will lead to economic disaster for many investors.”

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