In April, 2012, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which makes it far easier for companies to market their securities to investors.
Next month, rules mandated by the JOBS Act and adopted in July by the Securities and Exchange Commission will go into effect that loosen the decades-old prohibitions on general solicitation efforts such as cold calling, mass mailing, and running certain commercials. The rules won’t only apply to, say, start-up tech companies. They'll also apply to hedge funds, private-equity funds, and other alternative investment funds.
Will we soon see full-page advertisements for hedge funds in the Times, GQ, or Sports Illustrated? Maybe there will be smiling children and a line like “Invest in Cerberus: Your Future and Your Family.” Will they run commercials during the Super Bowl or the Sunday-morning talk shows? What about mass mailings to everyone in the tri-state area who bought a Mercedes-Benz or a Rolex last year? It’s all possible now.
The JOBS Act is based on the idea that the government should make it easier for companies to go public. And loosening the restrictions on private fundraising could make the I.P.O. process easier, which could lead to more I.P.O.s, which could lead to growth. To do this, however, the legislation had to reverse decades of precedent in which anyone approaching prospective investors in connection with privately-placed securities had to already have a relationship with them. Investors couldn't sell securities privately, for instance, if they published advertisements in a magazine. Starting next month, private companies will be able to advertise as much as they want, as long as those who eventually invest qualify as “accredited investors”—people who earn more than two hundred thousand dollars per year or have more than a million dollars in net worth, excluding their family home. The law was drafted so broadly that it applies not only to start-ups and other operating businesses but also to other securities issuers, such as hedge funds and private-equity funds.
Given that the adoption of the JOBS Act overlapped with the anti-hedge-fund rhetoric of the 2012 Presidential campaigns, during which Obama compared executives at Bain Capital to vampires, critics might be suspicious of his Administration’s inclusion of hedge funds and private-equity firms in the advertising liberalization. Obama enjoyed strong support from hedge funds and private-equity funds in 2008, followed by a sharp decline in support in 2012. By allowing these funds to participate in the advertising free-for-all during the middle of the campaign, was Obama attempting to quietly win back their affections?
Perhaps. But there are also policy reasons for removing the advertising limitations for hedge funds and private-equity funds. Hedge funds provide much needed liquidity to financial markets by actively buying and selling stocks and bonds, which gives would-be investors confidence that, when they eventually want to liquidate a holding, the prices and volumes in the market will permit them to do so. Without that confidence, many investors would be reluctant to participate in I.P.O.s, for example. Meanwhile, private-equity funds save faltering companies that might otherwise go bankrupt, frequently by taking a public company private and, after restructuring and reorganizing it, returning it to public ownership through an I.P.O.
Also, by allowing hedge funds and private-equity funds to benefit from the JOBS Act’s advertising provisions, the government will allow the funds to provide more information to would-be investors. These funds are often described as shadowy and secretive partly because of the ban on advertising, which prevented them from openly discussing their investment activities with the media and the public. Lawyers for these funds historically advised their clients that any decision to speak with journalists or publish information about their activities could be misconstrued by the S.E.C. and the courts as an illegal “general solicitation” for their funds.
By including hedge funds and private-equity funds as beneficiaries of the JOBS Act, Obama has signalled that you have less to fear from a vampire if you can actually see him.