You can see advertisements for liquor, lawyers, even implants for neutered pets — called “neuticles.”
What you can’t see, at least not yet, are ads for investment opportunities in privately held companies. A start-up or a hedge fund can’t just publish an ad that says, “Hey rich people, give me money!” That’s illegal, and has been since the Great Depression.
But the market is about to change. The SEC voted Wednesday to lift an 80-year-old ban on “general solicitation” for equity shares in companies that aren’t traded on a stock exchange.
For some people, the move is a good thing.
“We hear a lot of frustration from investors that these laws that are being lifted right now have really created a good old-boy network,” says Ryan Caldbeck, who runs CircleUp, a firm that connects investors with private investment opportunities.
He says the old rules reward prominent, bigshot investors. “If you’re a company going out to raise money, those are the ones you go to because you can’t market to a general audience,” Caldbeck says.
The new rules limit these investments to so-called accredited investors – people who have a net worth of at least $1 million or have earned more than $200,000 a year for the past couple years. Still, only a fraction of that group invests in private companies or hedge funds, Caldbeck says.
“We don’t think that’s because the other 90 percent wouldn’t have an interest in it, but the cost to find these companies is just too high.”
The SEC was required to allow these new ads as part of the Jumpstart Our Business Startups Act, known as the JOBS Act. The idea is that mass marketing would give needy startups wider publicity to attract financing, grow and create jobs.
It could also create scams.
“There is a huge dark gray storm cloud coming,” warns Heath Abshure, Arkansas’ securities commissioner and president of the North American Security Administrators Association.
He says advertisements for investments — on websites, in emails, on billboards even — will clutter the market. Some will be fraudulent, some will be risky, and people could lose money.
“There’s going to be so much noise and chaos in the market that legitimate companies trying to do the right thing won’t be heard over the din,” Abshure says. “Eventually investors will no longer trust this market, and when investors don’t trust the market no investments in small companies are made and no job growth occurs.”
The SEC is proposing investor protections, notes Brian Lane, who used to run the commission’s corporation finance division and is now a partner at Gibson Dunn.
“We all worry about aunt Minnie or Ma and Pa Kettle responding to an advertisement for an investment opportunity and saying yeah this sounds great,” without really understanding the risks, he says. “But the rules are clear. You have to be an accredited investor.”
Firms will have to verify that those investors meet the income or net worth conditions. “If that’s how it works then everything’s fine,” Lane says.
The bigger challenge will come when private companies can market their shares to small investors as well. The SEC is still debating rules for that.