HEDGE FUNDS PUSH TO REMOVE THE SEC PROHIBITION ON GENERAL SOLICITATION AND ADVERTISING FOR PRIVATE OFFERINGS- COULD SMALL INSTITUTIONS ALSO BENEFIT?

The Managed Funds Association (which represents hedge funds, commodity pool operators, and similar institutions) has recently petitioned the SEC to remove the prohibition on general solicitation and advertising for "private" (i.e., not required to be registered with the SEC) offerings. A bill to that effect has also recently passed the U.S. House of Representatives. 

While hedge funds and other managed funds differ in many ways from small business and financial institutions, removing the ban on general solicitation and advertising has the potential to benefit both markets.   Small business and financial institutions should carefully consider whether supporting this regulatory change could result in a greater ability to raise capital. 

Many small institutions rely on the "4(2) exemption" to make private offerings and avoid registration with the SEC. One of the requirements for this exemption is a prohibition on general solicitation or advertising to market the private offering. This means that, in practice, companies will often only market private offerings to those accredited investors with whom they have a pre-existing relationship. 

If a company could instead generally solicit for and advertise the marketing of its offerings, the potential customer base for the offering- and the amount of capital it could raise- may be much larger. Innovative, growing institutions would have the opportunity to forge relationships- and lay the foundation for future business opportunities- with a greater number of interested companies.    

Of course, any repeal of the general solicitation and advertising ban would not change the other requirements of the 4(2) exemption. Persons who participate in a private offering would still be required to be accredited (or otherwise be sophisticated and limited in number), securities received by investors would still have restrictions on later transfer, etc. Guidance would also be needed from the SEC on how much information (and how many disclaimers) must or may be included in general solicitations and advertising.  Determining the eligibility of responding potential investors (as accredited or sophisticated) could also be more difficult.  

But even considering those issues, in the current economic environment any change that allows institutions- large or small- to reach a greater number of potential investors may be very welcome indeed.