WASHINGTON U.S. regulators on Wednesday lifted an 80-year-old ban on advertising by hedge funds, private equity firms and other companies, paving the way for asset managers to reach a new swath of investors through television and the Internet.
The Securities and Exchange Commission's new rule lifts a general advertising ban on private securities deals that critics said was outdated in an era where companies frequently take to Twitter and Facebook to make announcements.
Although large players like private equity firms Bain Capital and Blackstone Group LP could take advantage of the chance to use television ad campaigns, lawyers and regulators said they expect smaller funds with fewer resources to test the new rule first.
"The lifting of the ban on general solicitation will prove to be transformative," said Barry Silbert, the head of the online private marketplace SecondMarket.
He said his company has already developed a general solicitation product that will help issuers handle the regulatory requirements.
Skeptics say the kinds of companies that may take advantage of advertising might not be the strongest place for investors to put their money.
"You know who it is going to help? Those companies that can't get capital from anywhere else," said Heath Abshure, the president of the North American Securities Administrators Association - a group of state regulators - and one of the most vocal opponents of the new rule.
Large, established funds will still avoid the TV spot, he suggested.
"Part of the lure of the hedge fund is keeping the undesirables out," he said.
JOBS ACT MOVES
The SEC first proposed lifting the ban last year after Congress mandated the change in a 2012 law known as the Jumpstart Our Business Startups Act.
The JOBS Act relaxes securities regulations to help encourage small companies to go public with the idea of boosting the economy.
It received wide bipartisan support in Congress, though it has become controversial. Republicans have lamented delays at the SEC in enacting JOBS Act rules.
Opponents say it erodes important investor protections, and those disputes led the proposed SEC rule to languish for nearly a year.
The debate between business interests and consumer groups has played out internally at the agency, with Republican commissioners Daniel Gallagher and Troy Paredes advocating for a lift of the ban quickly.
Democratic Commissioner Luis Aguilar urged that it be completely rewritten to include measures to keep investors safe.
Aguilar was the sole vote against the measure on Wednesday.
"I am disappointed and saddened by the reckless adoption" of the rule, he said. "I want to encourage you to fight on behalf of investors. They will need you now more than ever."
Although firms will be free to advertise broadly, they will still be allowed to sell only to more sophisticated "accredited investors."
Accredited investors have an individual income of $200,000 or a net worth of $1 million, excluding the value of their home. That represents roughly 7 percent of U.S. households, or more than 8 million homes, the SEC said.
To ensure they are selling to qualified investors, the SEC said companies should take certain steps, such as reviewing copies of tax forms or receiving confirmations from investors' brokerage firms.
The rule is set to kick in 60 days after it is published officially in the Federal Register.
Exactly who will use it remains to be seen.
"To the extent fund managers have an established marketing presence and a deep and liquid investor base, they may not have a need to utilize the rule," said Matthew Kaplan, a partner at the law firm Debevoise & Plimpton LLP.
In the private equity space, for instance, the traditional investor base is predominantly made up of institutional investors such as pension funds, rather than individuals.
SEC Chair Mary Jo White on Wednesday said it was important to move forward with the rule, as required by law.
"In my view, given the explicit language of the JOBS act as well as the statutory deadline ... the commission should act without any further delay," said White, who became the head of the agency in April.
However, she said she takes the views of investor advocates seriously, and the SEC took up two other protective measures.
First, it unanimously adopted a longstanding rule required by the 2010 Dodd-Frank Wall Street reform that would block felons and other law breakers from pitching certain private investment deals.
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 on television or the Internet.
The agency also voted 3-2 to issue a new proposal that contains a raft of measures requiring firms offering private placements to make numerous additional disclosures to regulators before they can broadly advertise for it.
That wasn't enough for Senator Carl Levin, a Democrat from Michigan who was one of the leading critics in the Senate of the JOBS Act.
"It's as if the SEC is jumping out of an airplane today, and then proposing to check the safety of its parachute on the way down," he said.
Wednesday's proposal would require any firm using general advertising to file disclosure forms 15 days prior to the general solicitation.
They would also have to provide additional details about the company, its website, its advertising and how it will use proceeds from the sale.
White said the proposal would help the SEC collect data on the private market to better monitor for fraud.
Its numerous requirements divided the commissioners and both Republican members said they had serious concerns.
"The proposal provides for a regulatory regime that would unduly burden and restrict the capital formation process," said Commissioner Troy Paredes.
New Jersey Republican Congressman Scott Garrett, a senior member of the Financial Services Committee, also criticized the measure as "unnecessary regulatory overreach."
Despite the criticism, White said she was committed to keeping consideration of the proposal on track.
At least one investor advocate said her confidence in White has been shaken as she feels the protections are being put forward as an afterthought.
"This is a poor beginning to Chair White's term as head of the agency," said Barbara Roper, the investor protection director at the Consumer Federation of America. "It sends a disturbing message about the Commission's likely priorities under her leadership."
(Reporting by Sarah N. Lynch; Additional reporting by Jed Horowitz and Greg Roumeliotis in New York and Sarah McBride in San Francisco.; Editing by Karey Van Hall, Lisa Von Ahn, Linda Stern, Chizu Nomiyama and Andrew Hay)