The Securities and Exchange Commission has come under fire for a rule proposal that would allow issuers of private securities, including hedge funds, private equity funds and venture capital funds, to advertise their interests.
The proposal, which was put out for comment by the regulator last week, is mandated under the Jumpstart Our Business Startups Act. The Investment Company Institute, the members of which face competition from hedge funds, criticized the rule proposal.
“We are keenly disappointed…that the commission apparently has not included…investor protection measures in the proposal, beyond those few specifically mandated by the JOBS Act,” Paul Schott Stevens, the president and CEO of the ICI, said, Investment News reports. “Misleading advertisements by private funds have the potential to confuse investors in funds of all types.”
In order to solicit the offerings, the funds rely on Rule 506 of Regulation D, a registration exemption under the Securities Act of 1933. Additionally, privately offered funds can take advantage of one of two exclusions from the definition of “investment company” under the Investment Company Act, which effectively shields them from the legislation’s regulatory provisions.
Section 201(b) of the JOBS Act stipulates that “offers and sales exempt under [Rule 506…] shall not be deemed public offerings under the Federal securities laws as a result of general advertising or general solicitation,” according to Dodd-Frank.com.
Todd Ganos, the owner of Integrated Wealth Counsel, which manages approximately $250 million in assets, expressed support for the ability of hedge funds to advertise.
“We’re not going to see…a situation of prisoners running the prison,” Ganos said, Investment News reports. “Reg D Rule 506 is only one of several regulations and rules that privately offered funds have to comply with.”
One of the controversial aspects of the SEC’s proposal involves the method by which issuers of private securities verify that investors are accredited. Regulation D stipulates that accredited investors must have a net worth of more than $1 million, $200,000 in annual income or $300,000 in annual income if filing jointly with a spouse.
Issuers of private securities want to continue the practice of obtaining signed statements from investors attesting that they meet the requirements. State securities regulators, however, want the SEC to require further proof of investors’ financial status, including income and tax records, according to Investment News.
The SEC said that issuers should consider the investor, how the investor was solicited, the terms of the offering and what they know about them.
The agency initially planned to move to implement the rules last month, but complaints from state regulatory agencies and investor groups about the lack of comment period forced the agency to change its plan, Investment News reports.