An SEC advisory committee recommended in October that the commission rewrite the proposal while seeking to ensure better compliance with a required form that tracks the initial offer. The committee also said the SEC should restrict the number of people eligible to invest by refining the definition of an “accredited investor,” or those considered rich enough to understand the risks and withstand an adverse outcome. About 7.4% of U.S. investors meet the definition.
“They have decided to allow blast marketing of private offerings without any meaningful adjustments to the regulatory structure,” said Mercer E. Bullard, a professor of law at the University of Mississippi and founder of investor advocacy group Fund Democracy. “It’s a complete repudiation of virtually all of the concerns expressed by two Democratic commissioners and the SEC’s own investor advisory committee.”
The SEC’s rule specifies two methods for companies to verify a person is qualified to participate, while giving them flexibility to determine other ways. Companies can review federal-tax documents to check the income of the purchaser or get confirmation of a person’s income or wealth from a registered broker, investment adviser, licensed attorney or certified public accountant.
The limit to sell only to accredited investors explains why many hedge funds probably won’t respond to the rule change by taking out print and television ads seeking new investors, said David S. Guin, a partner at Withers Bergman LLP whose clients include hedge funds.
Instead, the rule may free up hedge-fund managers to communicate more freely at conferences and to offer more information about fund performance on their websites, Guin said in a phone interview.
“You wouldn’t expect the type of person who is typically sought as an investor to be investing off of an ad in a newspaper or magazine,” Guin said.