The concept of “buyer beware” may be taking on a whole new meaning in the investing world under a proposed rule change by the Securities and Exchange Commission (SEC). The change would allow private offerings, hedge funds and other investment vehicles to go from soliciting individual investors behind closed doors to conducting widespread advertising campaigns without restrictions.
For more than three decades, hedge funds and other private investments have been barred from marketing to the public. Now, as regulators propose easing that ban, many fear unsophisticated investors might be lured into investing in products in which they don’t understand the risks.
As reported Aug. 29 by Bloomberg, SEC commissioners voted 4-1 to invite public comment on the proposed change. The proposal itself is driven by the Jumpstart Our Business Startups Act, which repealed a ban on pitching investments like hedge funds and private placements to all but a select few investors.
The Jumpstart Our Business Startups Act was signed into law by President Obama in April, and has drawn criticism from investor-protection groups who believe it could potentially expose more investors to misleading advertisements by some private funds.
“Unsophisticated investors will be inundated with offers of inappropriate investments sold through misleading advertisements,” said Barbara Roper of the Consumer Federation of America in the Bloomberg article. “Fraud will surge in a market already ripe with problems.”
Indeed, private offerings are the No. 1 fraud scheme leading to enforcement actions and investigations, according to the North American Securities Administrators Association. The number of cases involving these types of investments has increased 60% from 2010 to 2011.
The SEC plans to accept comments for 30 days before holding a final vote on the rule change.