Yesterday the Securities and Exchange Commission voted 4-1 to lift restrictions on how hedge funds, venture capital firms, and other privately held companies can promote themselves to potential investors.
While these firms will soon be able to broadcast their offerings, they can’t take money from just anybody: Investors must be accredited, which means the SEC considers them wealthy enough to risk their money. Critics say the change still opens the door to fraud. “Without common-sense protections, general solicitation will prove be a great boon to the fraudster,” Luis Aguilar, the lone SEC commissioner to vote against ending the 80-year-old ban, said in prepared remarks. The vote also gave fodder to quipsters on Twitter yesterday who tried out potential hedge fund advertising slogans, many of which made light of the industry’s disappointing returns.
In the startup world, it’s not uncommon to hear people complain that regulators’ desire to protect investors from Wall Street has delayed rules intended to make it easier for small businesses to raise capital. John Frankel, a partner at New York venture firm ffVC, says that general solicitation is especially important to firms that invest in early-stage companies. Frankel’s ffVC wants to use the rule aggressively when it takes effect in a little more than 60 days. I spoke with Frankel after yesterday’s vote. Here are edited excerpts of our conversation.
Why is this such a big deal?
I have 7,000 people in my Rolodex. If I want to tell them I’m raising a new fund, I have to call every one of them individually. I can’t go on Twitter, or Facebook, or LinkedIn and say it. You have to understand how significant that is. In financial services, people buy brands, not returns, which is the opposite of how it should be. The ability to tell people what our returns are, and to not have to do it one on one, we see that as incredibly positive.
It’s still more than 60 days before the ban on general solicitation is formally lifted. What will you do when the ban disappears?
We have a game plan. We plan to be early advocates and compliant users of the new legislation, subject to seeing the firm detail. It’s not about full-page ads in the Wall Street Journal. We plan to be much more visible in talking about our return history and how we see the risks and opportunities in the early-stage space.
You see this as especially positive for firms, like your own, that invest in early-stage companies. Why?
Where tech is today, this is a small-check business. The innovation starts with the company that raises $1 million, and only the small funds can cut the small checks. When you’re raising money, the large institutions want to invest large amounts. They don’t like to be more than 10 percent of a fund, so they invest in large funds. When you’re raising a small fund, you have to get the message out to high-net-worth individuals and smaller institutions, and it becomes plugging into an old-boys network. “I have a friend who’s raising a fund. …” It’s the same way people used to raise money to fund ships back in Lloyd’s teahouse in London in the 18th century. This is going to be a tectonic shift.