The JOBS Act and Us

On April 5, President Obama signed the Jumpstart Our Business Startups Act, designed primarily to lessen the regulatory burden on small companies looking to raise money and to allow firms to have more total investors before being forced to go public. Importantly, the bill also allows for crowd-funding of new and small companies.  At the ceremony commemorating the signing of the Act, the President had this to say on the legislation: “Overall, new businesses account for almost every new job created in America. For start-ups and small businesses, this bill is a game changer. Because of this bill, startups and small businesses will have access to a bigger pool of investors.”

In a lesser-known result, the JOBS Act also lifted a decades-old restriction on how hedge funds can go after new investors, clearing the way for managers to speak more publicly about their strategies and performance and also to advertise.  We might even expect hedge funds and other Reg D managers to offer public programs offering their wares.  This Act also lifted the 500 investor restriction on Reg D investments and increased it to 2000, allowing for (a) much more money to be raised via Reg D offerings; and (b) the potential for lower minimum investments in such funds.

Not everyone thinks these additional changes are a good idea. “As a hedge-fund manager, I’m delighted, but I’m not sure it’s in the best interest of the public,” says Andrew Lo, professor at MIT and chairman of AlphaSimplex Group, a $2.3 billion investment firm. The Act gives the SEC 90 days to revise rules that prohibit advertising and other communications by hedge funds, private-equity firms and other Reg D offerors. The new guidelines will establish exactly how such funds can solicit customers. “The staff are still in the process of analyzing the bill’s provisions,” SEC spokesman John Nester noted.

Not surprisingly, many worry that by marketing to the general public, Reg D firms (including hedge funds) will lure people into investments that are not good for them, mostly by being either too risky, too expensive or both. This new approach will surely bear watching, particularly with respect to the law of unintended consequences (“actions of people—and especially of government—always have effects that are unanticipated or unintended. Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it”).