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Now Legal, Will Hedge Funds Ads Plague TV Like Mutual Fund Ads?

Philadelphia Inquirer’s Your Money: Advice so you can judge ‘private offerings’

ERIN E. ARVEDLUNDPublished Tuesday, July 23, 2013, 1:07 AM

Do you have an investment or a start-up business for which you’d like to raise money? Now, to that end, you can advertise your venture – legally – on Twitter and Facebook, on television, even at a sports event.


Washington watchdogs have updated the Securities Act of 1933, the law that once barred American businesses from raising money by advertising private deals. The change was part of the Obama White House’s proposed JOBS Act, meant to spur small business after the Great Recession.Wall Street’s main regulator, the Securities and Exchange Commission, this month lifted the 80-year-old ban on advertising for so-called “private offerings” by hedge funds and private equity, angel investments, and other small businesses, or on crowdfunding sites such Kickstarter or Invested. In.

But the new rules don’t prevent bad guys from getting in on the action. So when someone asks you to invest in a businesses, remember the old advice – caveat emptor.

Provided that the correct paperwork is filed with the SEC, a business owner hoping to raise money can now do interviews, put information on websites, and appear at conferences, “and this doesn’t just apply to hedge funds and private equity,” says Terry Reilly, of counsel at Montgomery McCracken Walker & Rhoads L.L.P. in Philadelphia. “It applies to small companies in the Philadelphia business community as well.”

To prevent fraud, the SEC enacted a provision to keep out what are known as “bad actors” or those who might steal your money under the guise of a private offering.

But the clock only starts ticking on the “bad boy” rule now. Anyone who has a record of securities violations, such as insider trading, can still raise money via a private offering as long as the record is disclosed.

So read the footnotes carefully on any business deal, or call your state regulator to find out if the company’s founders have a record of such violations.

Who can invest

The private-offering marketplace is small but growing. In 2012, the estimated amount of capital raised under these Rule 506 and Rule 144A offerings was $173 billion and $636 billion, compared with $1.2 trillion raised in registered offerings, according to the North American Securities Administrators Association (www.nasaa.org).

Does that mean potential investors will start seeing hedge-fund advertisements during golf tournaments on TV – the same time we see all those mutual-fund ads? Reilly says those questions remain unanswered. “Will hedge funds advertise like mutual funds with specific dates and prominent performance numbers? We don’t know yet.”

Still, “this levels the playing field for those trying to get their name out,” adds Ron Geffner, a securities lawyer with Sadis & Goldberg in New York.

Also, those investing in private offerings will have to prove they are “accredited” – meaning they either have net worth of $1 million (excluding the value of primary residences) or annual income of $200,000 for at least two years, $300,000 with a spouse.

Even when the relaxed rules take effect, they won’t make investments in small businesses less risky – just more prevalent.

And the JOBS Act provisions don’t eliminate fraud, an unfortunate but not infrequent feature of small business, particularly those raising money on the Internet. Dubious investments in oil and gas, real estate, precious metals, commodities pools, and free-lunch seminars already advertise heavily on the Web, and many prove to be scams.

If you’re interested in investing in a private offering and want to know more about the people running it, you can start by calling the NASAA for the number of your state regulator!

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