SEC lifts marketing ban on hedge funds

The Securities and Exchange Commission is lifting an eight-decade ban on marketing certain types of securities to investors. But does that mean your inbox will suddenly be full of unsolicited investment proposals? And what does that mean for media coverage of certain secretive industries?

Here are some excerpts from the New York Times coverage of the SEC move:

Federal regulators on Wednesday lifted an 80-year-old ban on advertising by hedge funds, buyout firms and start-up companies seeking capital, a move that will fundamentally change the way that a large swath of issuers raises money in the private marketplace.

The Securities and Exchange Commission voted to approve a rule that Congress included in last year’s Jumpstart Our Business Startups Act, a law meant to help bolster small businesses and create jobs in the wake of the financial crisis.

The move allows start-ups and small businesses to use advertising to raise money through private offerings. Hedge funds and buyout firms, whose investment vehicles fall under regulations for private offerings, will also be able to promote their investment vehicles to the public. Restrictions remain on who can invest in hedge funds and private equity funds.

This is great news if you’re looking to raise money in the private market. The Wall Street Journal reported that safeguards will still be in place:

The SEC did propose a package of investor protections that officials said will help the agency track and police the roughly $900 billion in private offerings sold annually affected by the ban. The proposal would require hedge funds and companies to notify the SEC 15 days before an offering will be publicized. Currently, businesses must file a notification within 15 days following the first sale, but there are few if any penalties for failing to do so. Companies that fail to provide advance notice would be disqualified from making new private offerings for one year. Firms also would have to provide the SEC with additional information about their offerings.

The New York Times story also pointed out that the private placement market would likely be the biggest beneficiary of the new rules:

Even private placements, which are investments in privately held companies, have become more accessible to the public. In recent years, so-called secondary exchanges have developed on which trading in private companies takes place. Facebook was heavily traded in the private market before selling stock to the public last year. Today, shares of closely held social media companies like Twitter and SurveyMonkey change hands in online exchanges like SecondMarket. And small companies are looking to raise money through social media and other technology.

Though they garner far less publicity than splashy initial public offerings, private placements play as prominent a role in the financial markets. The amount of money raised through private offerings in 2011 was about $900 billion, compared with about $1.2 trillion in public stock offerings and debt deals.

The ban on advertising will officially end some time later this year after a 60-day waiting period. The rule will require hedge funds and companies that use general advertising to notify the S.E.C. 15 days before the solicitations begins.

But according to a Bloomberg story via Ad Age, we’re not likely to see hedge fund television advertisements anytime soon:

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 LLP 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, Guin said.

“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,” Guin said.

Operating companies also will be able to advertise for investors after the ban is lifted. They’ll benefit because they’ll be able to reach “a much broader audience than they would be able to with their own contacts,” Guin said.

While Madison Avenue isn’t staffing up just yet, it will be interesting to see which of the larger firms decide to advertise to increase name recognition. I’m sure executives at many firms are beginning to formulate plans for reaching target audiences in a vastly different manner, an exciting development for marketing professionals.

There was no mention in these initial stories about what this might mean for media coverage, but where there are marketing materials, there is paper for reporters to track down. Some of the best investment fund stories have been written from presentations and other marketing materials. Here’s hoping there are well-connected and enterprising reporters who will be able to access to funds’ information, shedding some light on private placements and other corners of finance.

The dream of seeing David Einhorn in a commercial will likely remain just that for now – a dream.