Monday, November 18, 2013
Cary Martin has posted One Step Forward for Hedge Fund Investors: The Removal of the Solicitation Ban and the Challenges that Lie Ahead on SSRN with the following abstract:
The JOBS Act accomplished what many thought to be inconceivable. After being excluded from the privilege of advertising for eight decades, Congress has finally lifted the solicitation ban for emerging companies, hedge funds, and various other private vehicles. With respect to the hedge fund industry, which is the primary focus of this article, there have been numerous discussions among commentators regarding the anticipated effects of this law. These discussions range from measuring the extent to which the JOBS Act will facilitate capital formation, to whether it will undermine this goal by leading to an influx of fraudulent investment schemes. In contrast, this article focuses on the anticipated effects that advertising will have on hedge fund investors, which can include wealthy individuals, pension plans, insurance companies, banks, and various other classes of institutions. This article argues that advertising could actually enhance investor protection for this subset of investors as it will likely improve transparency, promote healthy competition, and in some cases, make it more difficult for fraudulent advisers to induce prospective investors. And while the removal of the solicitation ban is generally a step in the right direction for hedge fund investors, this article concludes with a brief discussion of the regulatory challenges that still remain, and explains why these hurdles may be exacerbated with the removal of the ban. Such challenges include the inherent conflicts of interest and the lack of standardization with respect to hedge fund valuations, the fraud loophole created by smaller funds that escape oversight under the Advisers Act, and the potential increase in speculation that could significantly compromise investor confidence.