SEC lifts ban on hedge fund advertising

Regulators voted Wednesday to allow hedge funds and startup businesses to raise money through general advertising, ending a decades-old ban on the practice. 

The Securities and Exchange Commission (SEC) voted 4-1 to adopt a new rule allowing hedge funds and other businesses that issue private stock to promote the shares to the general public. 

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The action is a major step toward implementation of the Jumpstart Our Business Startups (JOBS) Act. The law passed Congress with bipartisan support and was enacted more than a year ago. But regulators have been slow to develop the rules required by the law, drawing criticism from lawmakers.

The JOBS Act was designed to ease regulations that can make it difficult for small businesses to get off the ground. 

“The harm is real when entrepreneurs cannot raise the capital it takes to build an aspiration into a business and when small businesses are forced to scale back or abandon their plans for growth because they do not have the funds to move forward,” Commissioner Troy A. Paredes said in remarks before the vote. 

The prohibition on soliciting funds from the general public will be officially lifted 60 days after the rule is published in the Federal Register. 

The ban stood for some 80 years and was intended to protect investors from unscrupulous businesses. 

The lone dissenting commissioner, Luis Aguilar, warned against easing regulations before enacting more protections for small investors.

“The record is clear that general solicitation will make fraud easier by allowing fraudsters to cast a wider net for victims,” Aguilar said. “It is reckless to create a known risk today, with just the hope of a speculative remedy tomorrow.”

Sen. Carl Levin (D-Mich.) echoed those concerns, saying the SEC’s promise to consider added protections later was “too little and much too late.” 

“It’s as if the SEC is jumping out of an airplane today, and then proposing to check the safety of its parachute on the way down,” Levin said in a written statement.