UPDATE 3-US SEC proposes dropping ad ban on private stock offers

Wed Aug 29, 2012 5:02pm EDT

* Seen helping hedge funds and small companies

* Rule required by law that promoted capital-raising

* Critics concerned about erosion of investor protection

By Alexandra Alper

WASHINGTON, Aug 29 (Reuters) - U.S. securities regulators proposed lifting a long-standing ban on the advertising of private securities offerings, a measure that could give a boost to private companies and hedge funds but has some critics worried that it paves the way to fraud.

The Securities and Exchange Commission voted 4-1 on Wednesday to issue the plan that would allow companies to advertise to investors so long as they take "reasonable steps" to verify that purchasers are "accredited investors."

Accredited investors include those with net worth of at least $1 million or an annual income of at least $200,000.

It is the first rule the SEC has proposed as part of the JOBS Act, which was signed into law by President Barack Obama in April. The law scales back a variety of securities regulations with the aim of helping smaller companies raise capital and spur job growth.

The rule would roll back a ban on advertising adopted over three decades ago that allowed companies to avoid registering their offerings with the SEC as long as they did not advertise to the general public and sold principally to accredited investors. Hedge funds also use the exemption.

Companies that took advantage of the registration exemption raised roughly $895 billion in 2011 compared to $984 billion raised in registered offerings, according to the proposal.

The public will have 30 days to comment on the proposal before it is finalized, although Republican Commissioners criticized the agency for not bringing the rule into effect immediately.

SEC Chairman Mary Schapiro voted in favor of the rule but expressed concern that the rule's rollback may have the potential to harm investors.

"I recognize that there are very real concerns about the potential impact of lifting the ban on general solicitation," SEC Chairman Mary Schapiro said in prepared remarks.

"While I'm prepared to bring forward today's narrow proposal, I look forward to the continued examination of this critically important market."

Democratic Commissioner Luis Aguilar voted against the rule, citing concerns about investor vulnerability.

"I cannot support today's proposed rulemaking because the commission is not considering ways to mitigate how today's proposal will harm investors," Aguilar said.

The JOBS Act passed Congress with bipartisan support, but faced opposition from consumer and investor advocates as well as some Democrats who said the law goes too far in cutting back important investor protections.

"Today, the SEC began undermining significant investor protections and putting ordinary Americans' investments at risk," Democratic Senator Carl Levin, one of the law's key opponents, said in a statement.

REPUBLICANS SLAM SLOW PACE

Republican commissioners hailed the measure's passage on Wednesday but were quick to criticize the SEC for failing to put the advertising rule in place immediately, through a so-called "interim final" rule.

Republican Commissioner Troy Paredes said it was "regrettable" that the commission had missed a 90-day deadline imposed by the JOBS Act for the rule and criticized Schapiro for "abruptly" changing course from a planned interim final rule to a proposal.

But Schapiro defended the decision, saying the change in plan was needed to gather more input on the rule.

"When serious commenters raised concerns about not having an opportunity to comment on a specific proposal, but rather be left with an interim final rule, it was my view that it would be wrong not to give them that opportunity to be heard," she said.

HEDGE FUNDS

Representatives of the $2 trillion hedge fund industry, which has been eager to advertise freely, praised the rule.

"We believe these steps will help modernize existing securities laws in a manner that will enhance financial market transparency and investor protection, and will allow for more efficient capital formation," Stuart Kaswell, general counsel of the Managed Funds Association said in a statement.

Kelli Moll, a partner at Akin Gump Strauss Hauer and Feld LLP, who heads up the New York hedge fund group, said the change would finally allow funds to post earnings on their websites, without worrying that it might be seen as advertising.

Don Steinbrugge, Managing Member of Agecroft Partners, said the final regulations will end up being very favorable to the hedge fund industry.

But other experts said people who qualify as investors for hedge funds would remain a narrow target.

"The loosening of restrictions on hedge funds advertising practices will not have a major short-term impact but is likely to become common in the longer term," said Larry Chiagouris, a professor of marketing at Pace University's Lubin School of Business in New York.

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