Why general solicitation isn't evilJuly 11, 2013: 10:47 AM ET
Hedge and private equity funds will be allowed to advertise, but it isn't a Wall Street plot to foist garbage on unsuspecting investors.
FORTUNE -- We've now had nearly 24 hours to digest the SEC's vote to end a ban on general solicitation on Rule 506 offerings, which generally covers private issuers like buyout funds, VC funds, hedge funds and unlisted companies. And we've also had time to digest the boatload of related commentary, much of which has boiled down to "buyer beware."
Look, I understand it's tempting to say that you shouldn't want to be part of any fund that feels the need to generally solicit. That it's a flashing neon sign of weakness. But I think the temptation is one of simplistic glibness, rather than of reasoned thinking.
For starters, let's remember that the SEC's move yesterday did not open up Rule 506 offerings to anyone who couldn't already invest in such securities. It simply enabled issuers to distribute their message more broadly via media that didn't exist when the rules were originally written. If you're an unaccredited investor, these ads will have the same practical impact on you that Porsche ads have on me. And if you're an accredited investor who has intentionally avoided alternative investment products so far, chances are you will continue to do so. Kind of like I do with gas station beef jerky (always tempted, but overruled by fear).
More broadly speaking, since when did advertising become an automatic admission of inferiority? Do we say the same thing of financial products like mutual funds? Or of investment banks? Or of Apple products? Or of high-end beef jerky?
In case you haven't noticed, fundraising is a very difficult process for the vast majority of companies and managers – and the more time spent marketing is less time spent operating the actual business (whether it be a startup of investment fund). If some of that could be sped up, it may improve results (at the least, it shouldn't hurt them). Plus, general solicitation will allow these issuers to drop the pretense of wink-wink SEC filings and "background" conversations with folks like yours truly.
To be sure, some issuers won't take advantage of general solicitation – including some size-constrained VC funds and certain companies who don't want the cap table complications – but I'll bet the ultimate figure is smaller than many currently believe. Certain funds still refuse to have websites. Are they de facto better performers than the rest? And are we so certain that the fund "exclusivity" hasn't, in large part, been a marketing ploy all along?
I've also heard catastrophic predictions about how general solicitation will drain retirement accounts of people whose accreditation is not correlated to actual sophistication. In some cases, this may well happen (like how some of those same people have bet their fortunes in penny stock schemes). But, at least in terms of alternative investment funds, it's rare to completely lose your shirt.
Median private equity returns (after fees), for example, beat the S&P 500 for the 3, 5, 10, 15, 20 and 25-year time periods. And for the past 25 years, only one year's "vintage" of private equity funds had a negative net IRR to limited partners (1997). To be sure, many of those years had meager returns, but not ones that caused investors to begin panhandling.
The larger worry may be in venture capital funds – median net returns generally beat S&P 500, but lower-quartile IRRs have been negative for 14 of the past 15 years – but that will be a much smaller universe of opportunities (by definition). As for hedge funds, all the headlines about lousy recent returns have been in comparison to the public equities markets and redemptions should allow thin-margined investors to pull out relatively quickly if things look to be going south.
As for startups, it will be a pure gamble. But, again, the unofficial reason for "accredited" investors is that these folks are rich enough to take a hit. The SEC continues to avoid the equity-based crowdfunding part of last year's JOBS Act, and part of me is beginning to seriously doubt that it will ever become law.
Groucho Marx once said that he wouldn't care to belong to any club that would have him as a member. And no one is forcing accredited investors to join. But Groucho never said that he shouldn't have the choice.
Sign up for my daily email newsletter on deals and deal-makers: GetTermSheet.com