Financial Regulatory Forum

JOBS Act provision opens door to hedge fund advertising, trade group urges caution

By Guest Contributor
April 9, 2012

By Emmanuel Olaoye

NEW YORK, April 9 (Thomson Reuters Accelus) - A little known provision of the new small-business capital JOBS Act opens the door to advertising by hedge funds, but an industry organization cautioned members that the advertisements must still comply with state laws and other regulations.

Firms registered with the U.S. Commodity Futures Trading Commission or state regulators should seek legal advice before advertising to the public to avoid the threat of enforcement, Ron Geffner, vice president at the Hedge Fund Association and partner at the law firm Sadis & Goldberg, told Thomson Reuters.“They may be subject to other rules that regulate the activity they seek to engage,” Geffner said. “Any form of hyperbole or exaggeration no matter how mild may result in the prosecution of the firm, which will have a detrimental impact not only in the legal costs of defending a civil penalty but in reputational damage.”

The Jumpstart Our Business Startups Act (JOBS) allows hedge funds to advertise their offerings to the public “whether online, in person, or through any other means.” The Act, which was signed into law last week, gives the Securities and Exchange Commission 90 days to eliminate the ban on advertising for an offering by a private issuer.

But hedge funds can only sell to qualified institutional investors (companies that manage a minimum $100 million in assets) or accredited investors such as individuals with a minimum net worth of $1 million.

Lifting of the advertising ban will pose different challenges to hedge funds depending on their size, Geffner said. “[With] larger firms, depending on the controls, there is a greater likelihood for inconsistencies to appear between advertisements, marketing pieces and questionnaires. Smaller firms often don’t realize the importance of information they are providing and [the] ramifications liability.”

The Hedge Fund Association said the lifting of the advertising ban would benefit registered smaller hedge funds whose size had made it difficult to reach investors “despite studies that show smaller hedge funds outperform large ones.”

Barbara Roper, director of investor protection at Consumer Federation of America, said the JOBS Act would increase the likelihood of fraud and make life more difficult for state regulators who are prosecuting “thousands of fraud cases each year.”

“Accredited investors are not necessarily sophisticated investors,” she said. “It will do more harm than good.”

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete (http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

 

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