Matt Kitzi Quoted Regarding SEC Ad Rule

July 12, 2013 Media Coverage

"This exclusive hedge fund is now open to you! Get in on the next Google!"

Expect to see such pitches soon in emails, TV infomercials and maybe even billboards and newspapers. For the first time in 80 years, it soon will be legal to openly advertise for investors in private securities offerings, which are a common way for hedge funds, private equity funds and new companies to raise money. 

Entrepreneurs have long complained about the federal ban on advertising. If a startup is raising money, its founder can’t mention that fact at an industry conference without risking the wrath of regulators. 

Congress responded to those concerns by passing the JOBS Act — short for Jumpstarting Our Business Startups — and on Wednesday, the Securities and Exchange Commission followed Congress’ instructions by ending the ban on advertising, effective in September. 

Scott Levine, managing member at St. Louis law firm Aegis, says the change is a modest positive for the entrepreneurs he represents. Startups will face less red tape, but he doesn’t expect many of them to launch ad campaigns. 

They can’t afford it. “Hedge funds will be the primary beneficiaries of this, because they have the resources to spend on advertising,” Levine says. 

The new rule, he says, is like being able to advertise a used car on the Internet instead of just telling your friends and neighbors about it. 

Not everyone who sees the ads, however, will be able to invest. Participants in a private offering must have a net worth of $1 million, excluding your house, or an annual income of $200,000 ($300,000 for a married couple). 

The SEC could have raised those limits, which haven’t been updated since 1982, but it didn’t. That leaves a lot of people, including retirees who are rolling over their 401(k) balances, vulnerable to a smooth sales pitch. 

“Income of $200,000 does not guarantee that you are sophisticated enough to understand these investments, or that you are wealthy enough to withstand the potential losses,” says Barbara Roper, director of investor protection at the Consumer Federation of America. 

Fraud is one concern. State securities regulators say private offerings are the No. 1 source of fraud complaints that they investigate. 

But even when the promoters aren’t fly-by-night operators, mass advertising raises concerns. For instance: How closely will anyone check to see if investors meet the criteria? 

“If you’re a small-business person who’s passionate about your business, and you have people who are clamoring to give you money, it’s going to be hard to turn them away,” says Matt Kitzi, a former Missouri securities commissioner who’s now a partner with law firm Armstrong Teasdale. 

Another concern is that marketing hype entices people into inappropriate investments. Hedge funds have high expenses and as a group don’t beat the stock market over long periods, but advertising may let them trumpet misleading, short-run results.

Read more...St. Louis Post-Dispatch
Published July 12, 2013