Companies that sell their shares to the public constantly disclose all sorts of details about their operations under the watchful eye of regulators, a time-consuming and expensive process that’s meant to help investors make sound decisions.
But firms that raise money solely from sophisticated private investors can skip all that — if they refrain from soliciting the general public. Hedge funds, for instance, can advertise offerings only to wealthy individuals, who can presumably withstand potential losses.
Now, that market tenet is about to be turned on its head. Congress has directed the Securities and Exchange Commission to lift the ban on general solicitation, in effect allowing companies to mass-market their private offerings for the first time since the 1930s. The goal is to help start-ups and small businesses raise capital more easily.
Technology has forced the issue. Decades ago, solicitation of the wealthy involved making cold calls or sending letters to country club members. Today, it’s much tougher to keep a private offering under wraps. The free flow of information through e-mail, Facebook, Twitter and other Web sites makes it difficult to control who learns about investment opportunities, a factor that policymakers have acknowledged for years.
Investor advocates are complaining loudly about the upcoming change. They say it will leave investors more vulnerable to fraud and high-pressure sales tactics, a position embraced by at least one SEC commissioner. As the SEC prepares to roll out the rules needed to lift the ban, consumer groups want the agency to mandate investor safeguards.
But the private-equity industry says Congress has adopted a common-sense approach that relieves firms of onerous constraints that stifle entrepreneurship. Those who want the ban lifted are pressing the SEC to stop dragging its feet. The agency was supposed to have acted by July 4, but all it has done is put out a proposal last August that has yet to be finalized.
As Congress instructed, the proposal will allow firms to advertise to whomever they want. But only “accredited investors” with a certain net worth or income will be permitted to make a purchase — the same restriction that’s been in place for decades.
The industry says it’s silly to limit who can know about a private offering. It’s far more important to restrict who can buy it, said Stuart Kaswell, general counsel of the Managed Funds Association, which represents hedge funds. In other words, why ban consumers from window-shopping at Tiffany’s just because they can’t afford the goods?