There seems to be some momentum for changes to the Regulation D’s prohibition on advertising a private fund offering. The Managed Funds Association has asked the SEC to start a rulemaking and one of the SEC’s new advisory committees has also recommended a change.
The SEC’s new Advisory Committee on Small and Emerging Companies approved its first recommendation on January 6. It urged the Commission to “relax or modify” the restrictions under Reg D to permit general solicitation and advertising of private fund offerings, but only to accredited investors.
3. The Advisory Committee is of the view that the restrictions on general solicitation and general advertising prevent many privately held small businesses and smaller public companies from gaining sufficient access to sources of capital and thereby materially limit their ability to raise capital through private offerings of securities; and
4. The Advisory Committee is of the view that the investor protections afforded by the existing restrictions on general solicitation and general advertising are not necessary in private offerings of securities whereby the securities are sold solely to accredited investors.
In a petition filed with the SEC last week, the Managed Funds Association states eliminating the general and advertising solicitation ban would “promote investment and enhance economic growth,” add new transparency to hedge funds and free up resources the agency could reallocate.
The House has passed a bill that would eliminate the advertising. It still needs support and action from the Senate.
Personally, I find the current ban hard to deal with because of uncertainty about what you can and cannot do. On the other hand, a broad allowance of advertising would likely perpetrate fraud. Currently, if you see an ad to invest in a private company or unique investment opportunity, it’s a red flag that the offer could be a fraud.
Sources:
- Managed Funds Association petition to the SEC (.pdf) January 9, 2012
- Recommendation Regarding Relaxing or Modifying Restrictions on General Solicitation in Certain Private Offerings of Securities (.pdf) from the SEC’s Advisory Committee on Small and Emerging Companies
- Managed Funds Association petitions SEC to end general solicitation ban for private funds from IA Watch
This move seems to be a double edge sword. On the surface it looks ideal for small companies, allowing them to broaden their reach at a time when traditional credit options are limited and many accredited investors are looking for alternatives. However, it could also feed heightened apprehension and wariness resulting in exactly the opposite effect. As you mentioned, the potential for fraud would increased as scammers would have access to greater numbers and the resulting bad press could make it much more difficult for legitimate operations to succeed. Not sure how I feel about this yet…