Hedge Fund capital raisers rejoice! The SEC has finally proposed rules to eliminate the prohibition against general solicitation and general advertising in certain securities offerings in accordance with the JOBS Act.
The SEC release states “Under the proposed rules, which are mandated by the Jumpstart Our Business Startups Act, companies would be permitted to use general solicitation and general advertising to offer securities under Rule 506 of Regulation D of the Securities Act and Rule 144A of the Securities Act.” SEC Chairman Mary Schapiro commented, “I believe that the proposed rules fulfill Congress’s clear directive that issuers be given the ability to communicate freely to attract capital, while obligating them to take steps to ensure that this ability is not used to sell securities to those who are not qualified to participate in such offerings.”
The Commission will seek public comment on the proposed rules for 30 days. Shortly thereafter, the Commission will review the comments and determine whether to adopt the proposed rules.
We have to wait 30 days for the SEC to seek public comment, and I expect there to be a LOT of comments based on the objections we have already seen from the regulated funds industry as well as those concerned with the potential for increased fraud as a result of the use of general solicitation. So the question is, will the SEC let these comments sway their thought process and as a result further delay adoption of the proposed rules or, gasp, make the process so burdensome that it makes the JOBS Act impotent? I doubt it. The pressure on the SEC to put rules in place surrounding general solicitations for the hedge fund industry is enormous, and their current handling of the implementation of these rules and the delays associated have not earned them any points with the investing community. Additionally, the Senate, Congress and the President have mandated that general solicitations be allowed in very short order, and IMHO, these are tough customers to keep waiting.
The SEC release did comment regarding making the investor accreditation process more intense as well. It was rumored that the commission may require hedge funds to hire third party providers to verify an investors net worth and qualification status, however the SEC has taken the stance that it will be too difficult to establish rules surrounding the verification process. The comission commented, “The SEC’s proposing release notes that proposing specific verification methods that an issuer must use “would be impractical and potentially ineffective in light of the numerous ways in which a purchaser can qualify as an accredited investor … We are also concerned that a prescriptive rule that specifies required verification methods could be overly burdensome in some cases, by requiring issuers to follow the same steps, regardless of their particular circumstances, and ineffective in others, by requiring steps that, in the particular circumstances, would not actually verify accredited investor status.” This is great news for the hedge fund industry in that funds do not have to increase their overhead to hire new providers for this verification process. I fear however, that the commission’s language may be too nebulous and as a result may open up funds to prosecution for not doing enough due diligence on an investor. Especially if this investor loses money in a fund that he was not qualified to participate in the first place.
Taking everything into account, as someone that owns and operates one of the biggest and most trafficked online resources for hedge fund information at HedgeCo.Net, I am starting to get very excited. By allowing hedge funds to generally solicit, we can finally open up HedgeCo to the public and make the process of getting into the site much less burdensome. Currently, in order to gain access to HedgeCo.Net you have to first fill out all your personal financial information online, then wait to get a phone call from one of our representatives where they will verbally verify the information posted to insure accuracy. Only after that call does a user get access to the data on the thousands of hedge funds listed with us. As you can imagine, this is a very inefficient process, and one that requires a lot of time and costs on our side to put people in place to make these calls to registrars all over the world at all hours of the day. Now, by allowing users to register and immediately gain access to the hedge fund data on HedgeCo.Net, we expect our traffic to increase tremendously.
We can now also offer hedge funds the ability to advertise their fund to our large user base. We can target different types of investors (ie: family offices, high net worth, etc.), we can target investors looking for certain styles of funds, assets under management, sharpe ratio, etc. These types of tools and others we have created specifically for hedge funds will be very powerful for firms who are looking to grow their AUM going forward. Also, as a result of owning not only HedgeCo.Net but also owning several other well trafficked hedge fund websites and having established relationships with hedge fund publications both online and offline, we have created the first Hedge Fund Advertising Network. In order to make the process easy, we have already established three different advertising packages for our new clients, or, we will obviously tailor a campaign to meet clients budget requirements and target audience. You can find more information on how to advertise your fund on our site at www.advertisinghedgefunds.com