Last week, to great fanfare, the Securities and Exchange Commission finally voted into effect one of the overdue provisions of the JOBS Act-lifting the ban on advertising for certain private securities offerings that cannot be purchased by the general public. That change was doubly overdue. The SEC ought to have taken action on its own rather than waiting for Congress to tell it to proceed. And once Congress told the SEC to lift the ban, the SEC ought not to have waited so long to implement the change.
In any case, the SEC's much-delayed action came with a catch-a companion proposed rule that threatens to weigh down the very private markets that the JOBS Act was trying to liberate. By enacting the JOBS Act, Congress and President Obama were acknowledging that it has become unacceptably difficult to bring together investors looking for investment opportunities and companies looking for investors. As a consequence, good investment opportunities were being lost and good business ventures were going unfunded. One of the obstacles was a rule by the SEC that prevented the use of advertising by companies looking for funding outside of the public markets.
As a general matter, any rule that prohibits information from flowing in the marketplace ought to be looked at with some skepticism. Advertising was broadly interpreted to include things like maintaining a publicly accessible website and speaking publicly about an investment opportunity. An advertising ban was particularly unwarranted in the context of private offerings, which are generally available for purchase only by "accredited investors." Accredited investors are folks who are wealthy enough to pay for good advice before investing and to take a hit if the investment is a flop. If someone who is not an accredited investor sees an ad for one of these private offerings, all he can do is dream about investing in something similar when he is wealthy enough. The SEC, in lifting the ban, made it clear that the onus is on the company issuing the securities to take steps to ensure it is not selling to unaccredited investors.
Opponents of the JOBS Act change worry that there undoubtedly will be fraudsters advertising their scams. Of course there will be fraud, but advertising by scam artists is nothing new. Fraudsters tend not to be particularly concerned about advertising bans or other regulatory prohibitions that stand between them and their victims. The best defense against fraud is training investors to be very skeptical about any investment opportunity that comes their way. Instead of lulling investors into relying on their friendly regulatory watchdog, the SEC ought to be repeatedly emphasizing the importance of asking lots of questions and not investing before getting satisfactory answers. Other measures can also help to stop frauds early. For example, the SEC's prohibition on felons and bad actors' raising money in private offerings-which it also adopted last week-will be a useful tool for securities regulators in their fight against fraud.
But the SEC went further. Having eliminated the advertising ban, the SEC proposes to impose another set of restrictions on private offerings.
Among other things, the SEC is thinking about requiring companies to make more detailed and earlier filings with the SEC, notify the SEC when an offering closes, and submit their advertising materials to the SEC. The SEC is also considering content restrictions on advertisements by hedge funds now permitted under the JOBS Act. Requirements like this translate into legal expenses that quickly create the type of barrier to raising money that the JOBS Act was trying to tear down.
SEC Commissioner Aguilar, who voted against lifting the advertising ban because it did not come with what he considered to be adequate investor protections, suggested that if Congress had simply wanted to lift the ban, it could have done so without any SEC rulemaking. The commissioner might be on to something. It might be time for Congress to bypass the SEC and write self-executing regulatory relief measures, rather than allow the SEC to take matters into its own reflexively regulatory hands.