When President Barack Obama signed the Jumpstart Our Business Startups Act into law one year ago today, his goal was to make it easier for small businesses and entrepreneurs to raise capital. Supporters of the JOBS Act are still waiting for the Securities and Exchange Commission to write rules needed to implement the law.
One reason for the holdup is that the SEC has a lot on its plate. The regulator is still writing rules required by the Dodd-Frank financial reform law and is in the middle of a leadership transition. If you squint hard enough, you can make out another reason: hedge funds.
Here’s how: One way the JOBS Act sought to ease the path for small businesses raising capital was by lifting the ban on so-called general solicitation, which severely limits how private companies can seek investment. To get investments flowing, the law was supposed to allow companies to broadcast widely their intentions to raise money.
The SEC asked for public comment on a proposal to lift the general solicitation ban in August. That raised the hackles of investor advocates, who worried that ending the ban on general solicitation without adding new protections would lead investors to lose all good judgment to the siren call of hedge fund advertising. (Even if the advertising ban is lifted, investing in hedge funds will be limited to accredited investors—people wealthy enough that the government assumes they understand the risk involved.)
Rory Eakin, chief operating officer at crowdfunding platform CircleUp, says the advocates have succeeded in giving the SEC pause. If hedge funds are the holdup, Eakin has a solution: He argues that the ban on general solicitation should be lifted in phases. Let only companies that are seeking direct investment market their offerings now, and worry later about how to deal with hedge funds, private equity firms, and other vehicles that pool money to be invested elsewhere.
“When Congress was writing the law, they spoke about providing resources for startups and small businesses,” Eakin says. The ban should remain for hedge funds and private equity groups: “Hedge funds are larger in scale, and some of them will have large advertising budgets,” he says. “The complex vehicles may be the ones that advertise more.”
Eakin isn’t the first to suggest such a plan. Last year a group of investor advocates including Barbara Roper, director of investor protection at the Consumer Federation of America, proposed keeping the ban on hedge fund marketing. “There’s a great logic to it,” Roper says. “There’s not a word in the congressional record about this being a way to allow hedge funds and private equity firms to mass-market themselves.”
While Roper would permanently prohibit hedge funds from advertising to the general public, Eakin wants small businesses to serve as a test case for perhaps lifting the ban more widely. The lessons learned would be applied later to more complex vehicles. Whenever it comes, Eakin says the change in general solicitation rules “has potential to benefit very many small businesses.”