CEI’s Berlau: “It’s About Time” SEC Permits Free Speech for Hedge Funds, VCs, and Entrepreneurs

WASHINGTON, D.C., July 10, 2013 — It took a year and three months after the Jumpstart Our Business Startups (JOBS) Act was signed into law, but the Securities and Exchange Commission on Wednesday finally lifted its ban on advertising and communications for hedge funds, private equity groups and the venture capital community.

John Berlau, CEI’s Senior Fellow for Finance and Access to Capital, had this to say in reaction:

“Lifting these archaic rules will be a victory for entrepreneurs, all types of investors, and, most importantly, the First Amendment.

“The SEC’s decades-old ban on ‘general solicitation’ by vehicles serving wealthy ‘accredited investors’ was wrong at the time, but is positively archaic today in the face of instant communication through the Internet and social networks. It is also paternalistic and anti-egalitarian.

“Under this ban and state variants, the ’99 percent’ of Americans not wealthy enough to invest in a hedge fund or in venture capital were prevented from obtaining basic information about how these alternative investments work. Similarly, budding entrepreneurs who sought to sell ideas to wealthy investors had to conduct whisper campaigns to find them or risk running afoul of SEC and state edicts that no ordinary investor hear these pitches.

“Allowing advertising and communication does not change the rules as to who can invest in hedge fund and venture capital. A series of policies, such as Regulation D, exempt securities offerings from many provisions of laws such as Sarbanes-Oxley and Dodd-Frank provided that only ‘accredited investors’ — defined by the SEC as those with assets of more than $1 million (not including primary residence) or income exceeding $200,000 a year — participate in the offerings.

“Whether the definition of ‘accredited investors’ should be loosened so that more middle-class folks willing to take these risks should be able to, or whether we need much of the red tape of Dodd-Frank and Sarbanes-Oxley at all, is another debate that CEI vigorously participates in. But what is settled First Amendment law is that a government agency cannot ban advertising or communication about a product to the public simply because some members of the public are ineligible to purchase it.”

>> Read more of Berlau’s reaction here.