An end to the 'general solicitation' ban?September 22, 2011: 10:33 AM ET
Private equity firms may soon be able to raise money via public advertisement.
The first time I ever spoke at a gathering of venture and private equity CFOs was also nearly my last. It was 2005, and I basically argued that the attendees were legally permitted to discuss active fundraising with reporters, so long as the reporters reached out to them (rather than the other way around). Sure it was self-serving, but I honestly believed – and continue to believe – that answering a direct question affirmatively was not the same as general solicitation. Moreover, the SEC had never busted a PE or VC firm for such a perceived "offense."
Well, the event's sponsors – a law firm and an accounting firm -- weren't too pleased. One of the law firm's senior partners got on stage to stress how my opinion did not reflect that of the legal community. The accounting firm somehow got in touch with my boss' boss, who insisted I write a clarifying email column (which I did, but only to reiterate my thesis – which became the last time that guy ever told what to write).
So here I am in Laguna Beach at another VC/PE CFO event, and last night I walked around the opening cocktail reception asking folks again about general solicitation. Not to relitigate past battles, but because the decades-old legal prohibition against such communications may soon be lifted.
Rep. Kevin McCarthy (R-CA) has introduced a short bill that would direct the SEC to "eliminate the prohibition against general solicitation as a requirement for a certain exemption under Regulation D."
The expectation is that this proposal could get packaged with a group of other bills aimed at encouraging capital formation, including the 500-shareholder rule expansion and a more controversial effort to reduce "crowd-funding" restrictions. And since McCarthy is Majority Whip, he's got the juice to make sure his pet projects get a vote.
To be clear, McCarthy isn't proposing a free-for-all. Accredited investor requirements would remain. He also isn't aiming this at PE/VC firms – his stated focus is small biz -- but they would still seem to benefit from the elimination.
My first reaction upon reading the bill was hesitation: Isn't this an investor protection rule? Couldn't real general solicitation – taking out a newspaper ad, for example – increase the risk of fraud?
Then I spoke to someone who had given the issue more thought, and he convinced me that the current prohibition is an unfair limiting of the capital pool. Why shouldn't a company or firm be able to get the message of its offering out to as many qualified investors as possible? The current system has simply promulgated the old-boys-network and I-bank client rolls. Plus, this is a rule that issuers take great pains not to trip over, even though the SEC has shown little interest in enforcing it (for evidence, check out the number of unpunished companies that send out press releases about "first closes" – an announcement that implies more securities remain available).
One could argue that the limited universe discourages fraud, because everyone knows each other. But that possible benefit doesn't outweigh the greater good of information distribution (and lower fundraising costs). And if you want to argue that accredited investor standards should be changed to reflect investor aptitude rather than net worth, I'd certainly be willing to listen. But so long as the SEC believes that accredited investors – under today's standards – are sophisticated, then what harm is there in letting more of them see prospective opportunities?
For VC and PE firms, this really will be more an issue of convenience than anything else. I don't expect many – if any – of them to take out ads in the WSJ saying that they're raising a new fund (well, maybe some desperate VC firms). But they no longer will have to tip-toe around reporters and other folks who may publicize their offerings.
"It won't make fundraising any easier, but it will still make my job easier while fundraising," one CFO told me last night. "Does that make any sense?"
Yes, yes it does.
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