There’s debate over whether it will actually create jobs, but the Jumpstart Our Business Startups Act that U.S. President Barak Obama will sign on Thursday is going to create new opportunities for hedge funds.
The JOBS Act includes a provision that lifts a 78-year-old ban on advertising for private placement funds, including both hedge funds and private equity vehicles. Such funds had been banned from soliciting or advertising their private offerings to the general public in exchange for being exempt from having to register their interests or shares with the Securities and Exchange Commission under Rule 506 of Regulation D.
But new rules requiring funds with over $150 million in assets under management to register with the SEC and making those with under $150 million subject to state registration, have removed the need for the advertising ban, said Mitch Ackles, president of the Hedge Fund Association. And that's good news for smaller funds:
“[T]his is really going to benefit them, I believe, more than it will benefit the multi-billion [dollar] funds. They have people waiting to invest, so you’re unlikely to see those Bridgewaters and so forth out there with a billboard in Times Square. But you will probably see additional advertising through online channels…You’ll probably see people being a little more comfortable talking to the media, and I believe that those are significant changes for an industry that has had to be so hyper-careful about what they say and who they say it to.”
Ackles told FINalternatives the new regulations could improve public perception of the hedge fund industry:
“[P]eople often believe the hedge fund industry to be mysterious and that’s because they don’t have access to all the information that these qualified investors have had access to and now that some of those restrictions—not all of them—are lifted, or will be lifted within 90 days of the president actually signing [the JOBS Act], that should allow the industry to engage more with one of its key constituencies—which is Main Street.”
Some commentators have suggested mystery (and exclusivity) have been among the attractions of hedge funds, and that lifting the veil through disclosure requirements could do more harm than good, but Ackles does not agree:
“As far as who can qualify to invest and who really gets access to all of the real detailed information about a fund, it’s still going to be the same investors, so the information that a fund will have to report is likely going to be information in the ADV. So they are not going to disclose everything.”
Ackles is also not worried that lifting the advertising ban will open the door to fraudsters:
“Fraudsters are going to happen whether this happens or not,” he says, “there’s always someone who claims to be a hedge fund, somewhere…There’s no greater percentage of fraud in the hedge fund industry than there is in any other industry.”
It is expected that hedge funds will be allowed to advertise shortly after the Securities & Exchange Commission adopts final rules, which is expected to occur within 90 days of the signing of the JOBS Act.
Hedge funds will still be restricted to selling their securities to accredited investors such as individuals with a minimum $1 million net worth and qualified institutional investors (companies that manage a minimum $100 million in assets).