UPDATE 1-U.S. SEC set to lift private placement advertising ban
WASHINGTON, July 10 (Reuters) - U.S. regulators were poised on Wednesday to lift a longtime ban on advertising for private securities offerings, paving the way for hedge funds, private equity funds and other asset managers to reach new investors through television and the Internet.
The Securities and Exchange Commission's new advertising rules will be attractive to smaller asset managers that until now have had a hard time competing with bigger competitors to reach new large institutional investors and wealthy individuals.
But big companies, such as large private equity firms Bain Capital and Blackstone Group LP, could also take advantage of the chance to use television ad campaigns.
The SEC first proposed lifting the ban last year after Congress mandated the change in a 2012 law known as the Jumpstart Our Business Startups Act. The JOBS Act relaxes securities regulations to help encourage small companies to go public.
But the proposed SEC rule has languished amid a bitter dispute between consumer advocates who fear lifting the ban will expose investors to fraud and pro-business interests who believe it will help spur small companies' growth and job creation.
Those divisions have also played out internally at the agency, with Republican commissioners Daniel Gallagher and Troy Paredes advocating for lifting the ban quickly, and Democratic Commissioner Luis Aguilar urging it be completely rewritten to include measures to keep investors safe.
Although SEC Chair Mary Jo White has the votes to get the measure over the finish line, the lifting of the ban is still likely to generate significant controversy among consumer protection groups and state regulators.
In remarks prepared for Wednesday, Aguilar issued a strongly worded dissent, saying the rule has fatal flaws because it does not contain adequate protections for investors.
"I am disappointed and saddened by the reckless adoption" of the rule, he said. "I want to encourage you to fight on behalf of investors. They will need you now more than ever."
Although firms will be free to advertise broadly, they will still be allowed to sell only to more sophisticated "accredited investors."
Accredited investors have an individual income of $200,000 or a net worth of $1 million, excluding the value of their home. That represents an estimated 7.8 percent of U.S. households, according to Federal Reserve data from 2010.
To ensure they are selling to qualified investors, the SEC said companies should take certain steps, such as reviewing copies of tax forms or receiving confirmations from investors' brokerage firms.
Still, those measures have not been enough to placate critics, who have said the rule needed a top-to-bottom overhaul.
SEC Chair Mary Jo White rejected that call on Wednesday, saying the SEC needs to get the rule done.
"In my view, given the explicit language of the JOBS act as well as the statutory deadline ... the commission should act without any further delay," she said.
However, she said, she takes the views of investor advocates seriously. To address those concerns, the SEC will take up two other measures on Wednesday.
First, it will adopt a longstanding rule required by the 2010 Dodd-Frank Wall Street reform that would block felons and other law breakers from pitching certain private investment deals.
Investor advocacy groups had urged the SEC to complete the "bad actor" rule before lifting the advertising ban, or else they said convicted felons could try to scam innocent investors on television or the Internet.
The agency will also vote on a new proposal that contains a raft of measures requiring firms offering private placements to make numerous additional disclosures to regulators before they can broadly advertise for it.
Most private placements are typically offered through a "safe harbor" known as Rule 506 of Regulation D, which lets companies raise an unlimited amount of money without having to register their securities.
The rules require the companies to file a form with regulators providing some information about the offering, but it does not have to be submitted until after the sale.
Wednesday's proposal would require any firm using general advertising to file these forms 15 days prior to the general solicitation.
They would also have to provide additional details about the company, its website, its advertising and how it will use proceeds from the sale.
Failure to comply with these rules would disqualify the company from offering a private placement under Rule 506 for one year.
White said the proposal would help the SEC collect data on the private market to better monitor for fraud.
"I am firmly committed to keeping consideration of this proposal on track," she said.