The Securities and Exchange Commission (SEC) Wednesday lifted a decades-old advertising ban to allow hedge funds and other private firms to raise money by advertising to the public. Opponents of the measure fear heightened investor losses and scam while proponents of lifting the ban say it makes sense and is complementary to the growing integration between business and the Internet and social media.
The decision marks the second loosening of governing restrictions in recent months as part of the Jobs Act, which aims to make it easier for small business to grow, raise capital, and create jobs. The SEC in April approved the use of social media sites such as Facebook and Twitter as a way for public companies to disseminate announcements and earnings as long as investors are told in advance where to look.
Under the advertising ban, which is set to expire this fall, firms issuing private stock offerings are only allowed to solicit wealthy individuals who can presumably withstand potential losses. However, in October, hedge funds and others will be able to advertise to the entire public via e-mail, billboards, or even social media.
The commission voted 4 to 1 in favor of the rule, with commissioner (D) Luis Aguilar dissenting. Aguilar has long argued that lifting the advertising ban would expose inexperienced investors to fraud and high-pressure sales tactics that can make it difficult to distinguish between legitimate offers and schemes.
Congress supports lifting the ban as it continues to push The Jobs Act, which was enacted more than a year ago. The SEC’s mission is to leverage the Act and find middle ground between empowering the business community to raise more capital while maintaining investor safeguards.
In support of finding that balance, the SEC unanimously adopted another rule that will restrict firms linked with felons and other “bad actors” from implementing the new advertising rules – the bad actors provision will go into effect by October as well.
In addition, the commission approved a measure that would require firms that do take advantage of the new advertising rules to disclose more information about themselves and notify the SEC of their solicitation before it happens. It’s unclear when, or whether, that plan will be finalized.
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