It took almost five months – including two postponements — for the SEC to concoct a proposed rule implementing hedge fund advertising that does nothing more than mimic the language of the JOBS Act.
The new statute directed the SEC to frame a rule setting forth the “reasonable steps” a hedge fund was to take “to verify an investor’s accredited status.” As it turns out, the SEC’s proposed rule uses exactly the same wording as the statute and goes no further, presumably because both the White House and Congress pressured the SEC not to impede the capital-raising and job-creating missions of the JOBS Act.
The SEC could have restricted hedge fund advertising content, required a cooling-off period following an investor’s response to an ad, required independent third-party verification of accredited investor status or required issuers to provide investors with full-fledged offering documents prior to sale.
None of these conditions found its way into the proposed rule despite SEC Chairman Mary Shapiro’s serious and persistent misgivings about lifting the ban on hedge fund advertising and the forceful objections to it raised by the mutual fund industry (see U.S. Funds at War), investor protection agencies and Luis Aguilar, the one dissenting SEC Commissioner (out of 5).
Interestingly, in 2011, private offerings in the U.S. raised almost as much capital ($895 billion) as SEC-registered offerings ($984 billion), but, during the same period, private placements were also the leading source of securities fraud schemes in the U.S. (410 cases).
The SEC’s proposed rule on hedge fund advertising is open for public comment for 30 days.