The JOBS Act Frees Hedge Funds to Advertise
Investors may soon get a keyhole view into the cloistered world of hedge funds and private equity firms, thanks to a little-known provision in a new bill that would relax rules on how investment firms can market themselves to the public.
The bill, called the Jump-start Our Business Start-ups Act, or JOBS Act, would reverse parts of a nearly 80-year-old regulation preventing these funds from discussing even the most basic items, like performance or investmentstrategy, with outsiders. The rule, part of the Securities Act of 1933, gave an already secretive industry the regulatory cover to remain silent.
“It’s a dramatic change from where the industry is,” said Tripp Kyle, a partner at the public relations firm Brunswick Group, which works with some of the largest investment firms in the world. “I think it presents a real opportunity for firms to evolve their mind-set from what they can’t do to what they can and perhaps should be doing.”
The bipartisan bill, which President Obama is expected to sign next month, enables hedge funds and private equity firms to solicit investors directly, instead of through third parties, which typically vet the firms before introducing them to clients. While the bill could ease the path to fund-raising, it could also introduce new risks to small investors unaccustomed to the complex and risky strategies the firms deploy.
“If you have a blizzard of advertising, it’s going to be much more difficult for people to do due diligence,” said Philip H. Harris, a partner at the law firm Skadden, Arps, Slate, Meagher & Flom.
Still, some say a new advertising climate would change little about the way individuals look at so-called alternative investments.
“It’s always been a buyer beware scenario,” said Irwin Latner, a partner at the law firm Herrick, Feinstein.
Whether they like it or not, hedge funds and private equity firms have increasingly been in the spotlight, facing unwanted government scrutiny and their own investors clamoring for more transparency. In response, the industry has been rapidly institutionalizing, tossing aside its freewheeling culture for large operations with top-notch compliance teams.
“This is one more step in the direction the industry is headed,” Jay Gould, a partner at the law firm Pillsbury, said of the new provision.
The final rules would be written by the Securities and Exchange Commission within 90 days of the bill’s signing. A lot could change through the process, including just how broadly the hedge funds can market themselves. But there is little argument in the industry that the move is a much-needed update to the current regulations.
“I think the impetus for this act is to modernize a lot of these rules to bring them in line with 21st-century practices,” said Steven Nadel, a partner at the law firm Seward & Kissel.
One rule that will not be affected is the restriction on who can give money to hedge funds and private equity firms. Firms will still only be able to accept money from individuals with more than $1 million of money to invest. And although the money managers may be allowed to advertise their returns, they will probably not be required to do so, meaning that investors could get an overly rosy view of the industry.
For the larger funds, the new law may not change much. Slick 30-second commercials from major hedge funds like Paulson & Company, the $24 billion fund run by John A. Paulson, are unlikely to start appearing on network television: for the bigger players, the client base is largely institutional, and therefore less swayed by mass marketing.
“The big takeaway is that it wouldn’t impact me one way or the other,” said John Brynjolfsson, head of the hedge fund Armored Wolf, which manages about $800 million in largely institutional assets. “This doesn’t sound like it would have a major impact on how we do our business.”
For smaller funds that may not have great media exposure, the relaxation of rules could prove valuable, allowing firms to communicate with a wider range of investors.
“A lot of the time, once legal counsel is done with your marketing material, it’s impotent,” said Abhinav Shukla, a founder of AlphaHarvest Capital, a small New York-based hedge fund.
A change in the marketing restrictions for hedge funds, Mr. Shukla said, would allow him to build a more robust Web site for his fund without angering lawyers or regulators. The site, he theorized, could include not only photographs of him and his business partner, but also information about the fund and recommendations for specific types of investors.