The day when you can advertise your hedge fund on Dealbreaker creeps ever closer, so claim your spot now because they are going fast.* The SEC has shown some justifiable skepticism about implementing the JOBS Act, and at least SEC-ster thinks that it’s been dragging its feet on the hedge fund advertising rules, but still, it has to be said, when the SEC was told to let you advertise your hedge fund, they really let you advertise your hedge fund. Soon you will be able to:
- say whatever you want about your hedge fund, and
- not say whatever you don’t want to say about it, as long as
- you take reasonable steps to actually sell it only to accredited investors.
Each of those things is a little surprising, no? First, there are no apparent restrictions on advertising – as DealBook says, “The commission was also mum on what sort of advertising would be allowed – can a hedge fund rent the Goodyear blimp, or will newspapers be the upper limit of public exposure?” You know who has blimp-sized plans? Of course you do:
“I am hellbent on creating a global brand and the only way to do that is through advertising,” said Anthony Scaramucci of fund of hedge funds SkyBridge Capital, which manages $3 billion in assets and hosts a star-studded industry conference in Las Vegas [attended by representatives of numerous hedge funds who built global brands by investing successfully rather than by advertising but let's not let a little absurdity slow us down - Ed.].
Earlier this year, Mr. Scaramucci had lunch with a midsize New York ad firm he says he could hire if the ban is lifted, adding he was waiting to learn what rules the SEC would issue and for his lawyers to approve any plans he might hatch.
So these rules apply to “private” or “unregistered” offerings, as opposed to “public” or “registered” offerings, which have always been able to feature “general solicitation.” Just – not so much of it. The “general solicitation” allowed for public offerings is in practice super boring and features a lot of 200-page prospectuses and virtually no blimps – remember all those TV commercials hyping the Facebook IPO? – as well as relatively little biased research put out by underwriters to sell the deal.
But the “general solicitation” that will now be allowed for private offerings seems to be much more public, and much more solicitous, than that allowed for public offerings. Like “Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio,” or “[a]ny seminar or meeting whose attendees have been invited by any general solicitation or general advertising.” I just, I mean, there are some simple rules that you need to know to survive in this complicated world, and one of them is anything at all sold to you at a seminar is a fraud. Have at it!
Anyway, and relatedly, while the SEC doesn’t restrict what you say, it also doesn’t require you to say much. There is no information requirement. In the olden days of private offerings you were allowed to sell to some non-accredited investors; now** if you general-solicit you can’t. But in the olden days you needed to give them, basically, registered-offering-type audited financial statements. But accredited-only offerings don’t require any financials, leaving plenty of time at those seminars to talk about how to triple your money using no-money-down real estate strategies.
Of course, you’re still only allowed to sell to accredited investors – basically institutions, individuals with a net worth of $1mm excluding their residence, and individuals with $200K (or couples with $300K) of annual income – though you have only to take “reasonable steps” to verify that. The SEC considered specifying what those steps would be, but decided not to, though it hinted that they’d be pretty lax:
[T]he ability of a purchaser to satisfy a minimum investment amount requirement that is sufficiently high such that only accredited investors could reasonably be expected to meet it, with a direct cash investment that is not financed by the issuer or by any other third party, could be taken into consideration in verifying accredited investor status.
So, I guess this says, if you can put up $50,000, surely you make at least $200,000 a year. What could, as they say, possibly go wrong?***
Doesn’t this feel a little like the SEC saying “okay, Congress, you want lots of fraud, here you go, enjoy your fraud”? Selling to “accredited investors” sounds pretty good because it sort of sounds like you have to pass a test, but of course you don’t: you just need to be a moderately successful dentist or interior designer. And now those people will have a lot more access to unaudited investment opportunities that are not publicly filed or reviewed by the SEC. I suspect they’ll have a lot of opportunities to choose from. Make sure yours stands out.
Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings [SEC]
Fund Managers Seek Their Inner Ad Men [WSJ]
Hedge Fund Proposal Would Allow Secretive Enclave to Open Up [DealBook]
* Also you will love our relaxed approach to truth in advertising, as evidenced in that sentence.
** Throughout, let’s just use “now” to mean “in the future when and if these rules go final in the form in which they were proposed.”
*** Actually there’s an interesting tidbit from footnote 50 in the proposal, where the SEC mentions SecondMarket’s comment letter “indicating that, in its experience, the majority of natural persons who indicated that they were accredited investors did so based on the income test of Rule 501(a)(6), which can be verified through tax returns, Form W-2, Form 1099, or other income documentation, in addition to a pay stub from the current year, whereas verifying that a purchaser satisfies the net worth test may be very difficult ….” So basically the modal human accredited investor is someone who has no assets and makes about as much as a first-year banking associate. Is that … a good thing?