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The Deal: SEC Ends Ban on Private Fund Advertising

NEW YORK (The Deal) -- The Securities and Exchange Commission voted 4-1 on Wednesday, July 10, to move forward with an element of the Jumpstart Our Business Startups Act, eliminating the prohibition against general solicitation and advertising of private placement offerings.

The new regime would affect hedge fund and private equity firms, as well as promoters of private offerings.

SEC Commissioner Luis Aguilar was the sole hold out on the advertising rule. He said the elimination of the solicitation and advertising ban put investors at too much risk for fraud, calling the regulator's action "reckless."

Official adoption of the general solicitation ban and bad-actor rule is subject to a 60-day public comment period and any final revisions by the SEC staff.

The vote on general solicitation has been eagerly anticipated by many market players, since the JOBS Act's passage in April 2012. The law gave the SEC 270 days to write the regulations, and the commission has been criticized for missing the deadline.

The amendment allows general solicitation in offerings conducted under Regulation D of the Securities Act, including sales of securities in private funds and startup companies based on limited information. Sales of securities under Regulation D are limited mostly to accredited investors. The new rule establishes a variety "reasonable steps" for issuers to follow to insure investors are accredited.

The regulator also adopted a rule to disqualify so-called "bad actors" from private placements, in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The "bad actor" amendment, mandated by the passage in 2010 of the Dodd-Frank Act, allows the commission to disqualify certain felons and others who have been sanctioned by securities regulators from being involved with issuers or promoters of these private offerings.

The SEC has not held a public meeting on the bad actor amendment since January 2012.

While the vote was 5-0 on the bad actor rule, Commissioner Aguilar said the amendment did not go far enough in protecting investors. He objected to a change that makes the definition of a significant shareholder -- who would also be covered by the rule -- too broad, raising the threshold from 10% of any class of securities to 20%.