SEC votes to lift 80-year-old ban on hedge-fund advertising

Operating Companies

Operating companies also will be able to advertise for investors after the ban is lifted. They’ll benefit because they’ll be able to reach “a much broader audience than they would be able to with their own contacts,” Guin said.

In an effort to address questions about deception, the commission approved a new proposal, on a 3-2 vote, that seeks to monitor how advertising is used and whether it contributes to more fraud. The SEC also approved a rule that blocks felons and others found culpable of securities-law violations from marketing private offers, which are more lightly regulated than public offers of stock or debt.

The three-step process allows White to complete the required rulemaking before two new commissioners replace Walter and Commissioner Troy A. Paredes later this summer. Paredes and fellow Republican Commissioner Daniel M. Gallagher voted to lift the ban.

“We want this new market and the private markets in general to thrive in a safe and efficient manner, and the rules we adopt today are designed to achieve that objective,” White said.

Paredes and Gallagher voted against the proposal to add new rules to private offers, saying it would restrict their role in capital formation.

“The proposal, if adopted, would undermine the JOBS Act goal of spurring our economy and job creation,” Paredes said.

Under the proposal, advertising would have to include cautionary statements about the risk of the investment and a disclosure that the offer is open only to accredited investors.

Companies raising money through private offers also would be required to file a required statement, known as Form D, to the SEC 15 days before the offer closes. The form would include information on the type of advertising used. Companies would have to update the information contained in the form within 30 days of completing the offer.

Companies that failed to comply with the form requirements would be disqualified from conducting a private offer for one year.

Sales Literature

The proposal also would alter SEC guidance to make private funds such as hedge funds accountable for fraudulent or misleading sales literature. Investor advocates such as the Consumer Federation of America have expressed skepticism about whether the proposal will ever be adopted.

“I don’t think it’s a hopeless exercise but there are a lot of examples where the SEC just can’t get proposals to fruition,” Bullard said in a phone interview. “To be fair, it was either do something now or wait probably at least two or three months after the new commissioners are in place.”

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