* 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 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
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
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
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.
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.