Hedge funds and other companies seeking private investments would be free to advertise publicly for funding under a rule set for a vote Wednesday by the SEC.
The rule is the first of those required by last year's Jumpstart Our Business Startups Act to be approved by the Securities and Exchange Commission, the vote coming more than a year after a deadline set by Congress.
The rule would lift an 80-year-old regulatory practice that has restricted advertising outside of a public offering in an effort to protect small investors from inappropriate risks. Under the new rule, startups and other small companies also would be able to use advertising to raise unlimited amounts of money.
“It changes the whole paradigm of who you can talk to,” said Brian J. Lane, a former division director at the SEC and now a partner at Gibson, Dunn & Crutcher in Washington. “Hedge funds will benefit because they have the most restrictions on their ability to communicate more broadly about different funds coming to market.”
The rule affects how companies raise money through so-called “private offerings,” which are exempt from requirements to publicly report financial statements. Private offers are restricted to wealthier investors, who are considered better positioned to understand the risks of investing with less information.
An SEC advisory committee recommended in October that the commission rewrite the proposal while seeking to insure better compliance with a required form that tracks the initial offer. The committee also said the SEC should restrict the number of people eligible to invest by refining the definition of an “accredited investor,” or those considered rich enough to understand the risks and withstand an adverse outcome.
The limit to sell only to accredited investors explains why many hedge funds probably won't respond to the rule change by taking out print and television ads seeking new investors, said David S. Guin, a partner at Withers Bergman whose clients include hedge funds.
Instead, the rule may free up hedge fund managers to communicate more freely at conferences and to offer more information about fund performance on their websites, Mr. Guin said in a phone interview.
“You wouldn't expect the type of person who is typically sought as an investor to be investing off of an ad in a newspaper or magazine,” Mr. Guin said.