I take back whatever mildly negative things I may have said about the JOBS Act, since apparently in addition to making it easier for small startups to rip off investors, it will also make it easier for small hedge funds to rip off investors:
President Barack Obama’s securities-law rollback known as the Jobs Act, expected to be signed into law next month, also contains a provision that would lift the ban on the marketing of private funds, potentially giving hedge funds, private-equity funds and others greater freedom in marketing their offerings to the public, industry attorneys said.
Currently, private funds are allowed only to market to a small group of investors: those with whom they have pre-existing, “substantive” relationships. Under the bill, hedge funds could start sponsoring sporting events and begin advertising their funds in print, the lawyers said.
The shift is “significant” and could provide a boost to small hedge funds trying to raise capital but that lack brand-name recognition or wide contacts, says Steve Nadel, a hedge-fund lawyer with Seward & Kissel LLP in New York; larger, more established firms sometimes have investors waiting to invest.
The Journal goes on to talk about the free speech aspect of this, and I did that too, so yay, now you can tell strangers how awesome your hedge fund is, AND OF COURSE YOU WILL DO JUST THAT, and you probably are already and are surprised to learn that it’s illegal*? Also, and more importantly, soon you will be able to give people money to induce them to tell strangers on the internet how awesome your hedge fund is, so, y’know, consider giving us some of that money, because we like money.
A lot of the JOBS Act is about democratizing access to investments that are terrible ideas, on the principle that regular people should have the same ability to lose their money in fancy scams that rich people currently have. This provision, it’s important to say, isn’t that: you still mostly have to be an accredited investor (rich person) to actually invest in hedge funds. It’s just that now, if you are a non-rich person, you are allowed to be told things about hedge funds. That does you no good!
But it probably does the rich people some good. Right now hearing about small hedge funds is a pretty hit-or-miss proposition because of that need for “substantive” relationships, so fundraising for a small hedge fund means leveraging your former employer, your contacts from your former employer, your prime broker, your family, your college roommates, etc. This means that connections are hugely valuable in getting money, and so a nontrivial amount of hedge fund money is allocated based on connections rather than demonstrated returns. Similarly you can’t advertise, but you can seek publicity and news coverage and be a talking head and go to lots of conferences – it’s just not clear that those activities add much to your investors’ returns. (Ask this guy.)
My guess is that allowing advertising shifts the focus more to track records. There is probably not much to be gained from putting up an ad on Dealbreaker saying “hey, invest in my hedge fund because I am sweet at lacrosse and have a rich father-in-law,” though who knows, you should try it anyway. Instead being able to advertise widely, even if you can only take investments from the accreditedly rich, probably at the margin helps funds with good strategies and demonstrable records and hurts funds who coast on their principals’ past accomplishments and connections. And at the margin that’s probably good for hedge fund investors.
Jobs Bill Opens Door to Hedgie Advertising [Deal Journal]
* It’s not really. Don’t worry.