The Securities and Exchange Commission Wednesday lifted the ban on advertising by issuers seeking private investment. Opponents of the rule mandated by the JOBS Act dubbed it the hedge fund ad ban, as a way of evoking a risky, black box investment culture that takes advantage of unsuspecting investors.
While much of the attention has been focused on how Wednesday's SEC action may help hedge funds, a constituency will clearly be hurt: entrepreneurs.
The reason lifting the ad ban was included in the JOBS Act in the first place was to help entrepreneurs and small businesses find new ways to finance their ventures. The ban was cutting entrepreneurs out of using crowdfunding and other non-traditional platforms to raise seed money. By ending it, Congress was trying to give the future Mark Zuckerbergs of the world a boost.
"Today, it is illegal for you to run an ad or put on your website that you're looking for funding in the hope that sophisticated investors would come to you to offer an investment," said Brian Lane, a partner at Gibson Dunn & Crutcher and a former director of the SEC's corporation finance division. "Today investor portals on websites are typically password protected."
While the SEC voted to lift the ban, it did not change the rules about these investments being limited to accredited investors. Those are people who either have $1 million in investable assets, not including their homes, or made $200,00 for each of the last two years, or $300,000 with a spouse. Hedge funds and others who are raising money in private transactions are only supposed to sell shares to accredited investors. That's still true, only now they'll be able to solicit them openly.