The SEC lifted its ban on hedge fund and private equity firm advertising after Congress mandated that the Commission allow general solicitation of securities offerings in accordance with its Jumpstart Our Business Startups (JOBS) Act.
Meanwhile, analysts and state commissioners warn that the elimination of the advertising ban "before approving safeguards" will needlessly put investors in harm's way," according to Arkansas securities commissioner A. Heath Abshure.
Investment Company Institute President and CEO Paul Schott Stevens agrees, stating instead of addressing investor protections upfront, the SEC put forward a proposal to consider whether to add safeguards "at a later date."
Massachusetts Securities regulator William Galvin—who has aggressively enforced securities rules in the past—went a step further by stating his opinion that the SEC's new rule will put investors in grave danger.
"[It] sets in motion a much easier path for shady operators and outright crooks, said Galvin.
He pointed out that firms' newfound ability to advertise nearly without restriction will make it difficult to protect against abuses such as false advertising: "I do not begin to think that one state can monitor and police the internet," Galvin said.
Advertising and general solicitations can be harmful if taken at face value—hence the previous ban on hedge fund ads.
Because the new rule allows for such advertising "without having to fulfill prior federal and state registration or exemption requirements," it can boost fraud by making it easier to deliver false or patently misleading information to investors.
Instead, Galvin's solution for the state of Massachusetts is the creation of the Internet Crowdfunding and Offerings Watch Department, or "I-CROWD."
I-CROWD will protect investors by gathering and assessing data from public advertising, tracking how issuers of securities use the new rules that allow general solicitation and advertising of non-public offerings. If I-CROWD spots a fraudulent offering, the plan is to alert regulatory agencies early so as to best protect investors.
If you have invested in hedge funds or private placements with any firm through advertising or general solicitation you feel was false, fraudulent, misleading or contained omissions or misrepresentations of material fact, and such false advertising has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.