The Securities and Exchange Commission voted in late August to abolish the general solicitation ban for hedge funds, private equity firms, and venture capitalists. This ban, in force since the 1930’s, while intended to protect investors, had the unintended consequence of keeping many potential investors in the dark with regard to available investment opportunities. That could change in 2013.
An Unintended Consequence of Lifting the Ban
At least one unintended consequence of lifting the decades old ban could be an uptick in employment in the industry. Some even suggest that a lift of the ban would encourage foreign funds to establish offices in the United States. This makes perfect sense.
With an estimated three million Americans meeting the SEC’s current eligibility guidelines for investment, this substantial pool of potential investors is difficult to ignore. Hedge funds would not be the only beneficiary. As stated earlier, the removal of the ban would also apply to private equity and venture capital concerns. Given the considerable overlap in many aspects of these enterprises, there is real potential that a veritable bidding war for talent could develop in the wake of lifting the ban.
Hedge Fund Marketing Made Easier
One of the great challenges faced by any hedge fund firm, but particularly a new fund, is raising assets and generating momentum. Lifting the general solicitation ban has the potential of revolutionizing the marketing paradigm. Importantly, it provides new fund managers a tool that has historically been unavailable — the ability to advertise. This creates an environment conducive to start up hedge funds and as a result, more job opportunities.
The SEC vote to lift the general solicitation ban is the direct result of passage of the JOBS Act, as SEC Commissioner Daniel M. Gallagher makes clear in his statement. Equally clear is Gallagher’s impatience with the process. Gallagher would have preferred an interim rule rather than a proposal. However, this is a significant change for the industries affected and one could make the case that a cautious pace is the wiser choice.
The President signed the JOBS Act into law April 5, 2012. The 90 days for lifting the solicitation ban has passed and so has the thirty days allowed for public comment on the SEC rule change.
However, the delays will likely continue.
Mary Schapiro, the current SEC chair will resign by year’s end and no final proposal is likely to be considered until her replacement is in place. This is not likely to happen until after the President’s inauguration. Then, the new Chair will require at least a month of orientation and that suggests the earliest the new rules will be implemented is late in the first quarter of 2013. The real issue to be decided is not about lifting the ban. That has been decided as a matter of law. The issue is the formulation of rules to regulate the advertising and to ensure that only investors meeting the criteria established in the JOBS Act are permitted to invest.