Could Jobs Act Advertising Rules Make Securities Fraud Easier?
In an effort to create more jobs and boost the economy, the Jumpstart Our Business Startups Act (JOBS Act) was created to facilitate the funding of small business and start-ups by easing current securities regulations. Signed into law on April 5, 2012, by President Barack Obama, the JOBS Act is comprised of seven sections, or Titles, three of which went into effect immediately.
Two parts of the bill, Title II and Title III, have caused much debate among securities regulators and require significant changes As a securities attorney that represents investors in fraud claims, the significant change that concerns me is the lift on the 80-year old ban on advertising on private placements and hedge funds. I am all for job creation, but this lift could have disastrous effects on main street Americans.
Private placements and hedge funds are extremely complex and risky investments. The old rules were in place to limit the accessibility of these investments because, frankly, these investments are not appropriate for most investors. Lifting the ban on advertisements for these offerings will only increase the chances that unsophisticated investors will be lured into these products.
Under the old system, hedge funds and companies looking to raise money through a private placement were required to find investors by either working with qualified institutional investors or using a brokerage firm to help them find qualified investors. Although brokerage firms do fail to perform the appropriate due diligence on some offerings, including them in the process is vital to protecting investors from fraudulent offerings (particularly since hedge funds and private placements are an area that is not stringently regulated by the SEC). The lack of regulatory oversight on private placements and hedge funds was one of the main reasons why advertising was banned for these investments in the first place.