(Updated at 3:10 p.m. EDT) SEC commissioners on Wednesday removed a long-standing ban on general solicitation and advertising by hedge fund managers and other issuers of private offerings.
Securities and Exchange Commission Chairwoman Mary Jo White, who was under pressure from Congress to remove the ban and make other changes required by the Jumpstart Our Business Startups Act of 2012 — a law passed last year intended in part to help small business — joined three other commissioners in voting to end the ban, with Commissioner Luis Aguilar dissenting.
SEC staff will now develop a list of methods that private firms can use to ensure that offerings are only made to accredited investors, and establish internal procedures for the agency to evaluate verification practices. The change becomes effective 60 days after publication in the Federal Register.
While unanimously agreeing to disqualify felons and “bad actors” from participating in private offerings, a more divided commission voted 3-2 to develop additional requirements for Form D filings and new guidance to protect against misleading solicitation materials. Barbara Roper, director of investor protection for the Consumer Federation of America, said in a statement that while thoseadditional requirements could offer some safeguards, “the SEC has a long history of proposing investor protection rules that it never gets around to finalizing.”
Further rulemaking also raises “complex legal issues” for private funds, which already have broad anti-fraud restrictions on marketing literature, said Stuart Kaswell, general counsel of the Managed Funds Association, Washington, whose members welcomed lifting the ban. In the meantime, said Brian Lane, a former director of the SEC’s Division of Corporation Finance who is now a partner at law firm Gibson, Dunn & Crutcher in Washington, “you need to make sure that you comply with the requirements and you need to make sure that people meet the accredited investors’ criteria.”
“At the end of the day, I think they’ve struck a good balance” updating 80-year-old rules, said Barbara Novick, vice chairwoman and head of government relations for BlackRock in an interview. “I think they are going to look a lot more closely at people’s practices. If the information is more available and transparent, I think it can be more self-correcting. Sunshine is a good disinfectant,” she added.