May 27th, 2014

Kim Wales,

Crowdfunding is on the rise in today’s re-regulated and democratized global capital markets, and the JOBS Act is proving to be a game-changer for institutional investors.

After the Lehman Brothers’ bankruptcy left the market reeling, some questioned how a single U.S. investment bank could cause global pandemonium. Today, a change of course is underway. The economic turmoil since 2007 has provided a catalyst for change. As a new guard is called into order to rein in provincial finance, the old guard is preparing for life under the regime of the Jump Start Our Business Start Ups Act (JOBS Act). Crowdfunding – a new asset class and a new investor class – is on the rise in this re-regulated and democratized global capital market.

[Related: “Strength in Numbers: The Rise of Crowdfunding”]

Many private funds have not yet embraced what is slated to become the game-changer and the most innovative reality for 21st Century Finance for generations to come. The millennial generation (ages 18 to 37), which makes up 86 million individuals and is larger than the baby boom generation, is at the forefront of a new economic movement that believes that it is important to grapple with issues such as inequality and its economic consequences.

JOBS Act, Title II: General Solicitation and Advertising

General Solicitation and Advertising, or “crowdfunding,” for the accredited investor went live on Sept. 23, 2013. However, private investment funds remain restricted in the types of investors they may tap under the new SEC rules. The regulators stipulate that funds raise money only from “accredited investors” who earn more that $200,000 per year or have assets totaling at least $1 million, excluding their primary home.

Since changes to the “general solicitations” rules took affect last fall, some new hedge funds have dipped their toes into the advertising waters by creating videos and posting promotional materials on websites. Last December, Topturn Capital, a $100 million hedge fund, created a three-minute advertisement for its website with images of a professional surfer surveying rocky waters, interspersed with the company’s two founders discussing how managing money is a lot like surfing.

Until recently, the changes have been met with caution by an industry that has long benefitted from the appearance of exclusivity. Maintaining and cultivating the image, in fact, has been the primary focus of hedge fund marketing efforts for most of the past three decades.

Mixed Messages

Proponents of looser regulations argue that allowing hedge funds to discuss their performance publicly will make them more accountable and cast light on a dark corner of the financial services market, thus helping to better inform investors. Detractors have voiced concerns that a proliferation of advertisements will lure unsophisticated investors into investments that they do not fully understand and cannot easily leave. Other critics point out that the hedge funds that choose to advertise will be opening themselves up to closer scrutiny by regulators and more frequent audits.

With investors representing $17 trillion of assets under management and companies representing $8 trillion of market capital, there is an opportunity to redirect (or self-direct) investment dollars and evolve capital formation despite the choppy economic terrain.

Until data is gathered, analyzed and the information disseminated in a meaningful way, it remains difficult to conclude which speculators have conveyed the right sentiment utilizing the new regime.

Meaningful Statistics?

Private Equity Spotlight,” a report published by Preqin in May 2014, highlights what private equity funds can do to differentiate themselves in a competitive fundraising environment, starting with the question: “How does the JOBS Act impact fund managers?”

Preqin’s survey of 150 fund managers reveals that both private equity managers and hedge fund managers in the U.S. appear skeptical of using Title II, Regulation D, Rule 506(c), with 50% of U.S.-based hedge fund managers and 55% of U.S.-based private equity managers feeling that the JOBS Act will have no significant impact on the industry.

Preqin’s survey also highlights that alternative investment managers have been slow to take advantage of the marketing opportunities presented by the JOBS Act, with just 4% of hedge fund managers and 5% of private equity managers indicating that they have already registered under 506(c), which permits general solicitation.

Early Adopters

Years of lackluster performance and growing competition for institutional investors such as pension funds have made hedge funds warm to the idea of branding. Just do not call it advertising.

Older hedge funds with big-name founders have joined in less directly. Bridgewater Associates, the $150 billion hedge fund, posted a video on YouTube a day before the new advertising rules took affect featuring its billionaire founder, Ray Dalio, in a 30-minute lecture called, “How the Economic Machine Works” (below). Other funds are adding more information to their websites and fund managers appear more frequently on business networks such as CNBC and Bloomberg.

Private investment funds are beginning to test the waters, according to analysis conducted by the SEC. Looking at disclosure statements (Form D) made by companies – which are required to file with federal securities regulators within 10 days after completing their fundraising under the new rules – lifting the general solicitation ban has resulted in nearly 900 new offerings, raising a combined $10 billion, since the start of the implementation of Title II under the JOBS Act on Sept. 23, 2014. Over the same period, small firms under the old rules (Regulation D, Rule 506(b)) raised a total of more than $233 billion and filed 9,200 offerings.

Fostering capital formation for the long term will only succeed once investor confidence is restored, market transparency becomes the norm and the system of inequality is no longer tolerated; this takes patience and perseverance.

Opportunity Lurking

The new advertising rules have also presented an opportunity for hedge funds, which are increasingly going after money from institutional investors such as sovereign wealth funds and pension funds. Before the financial crisis, money from institutional investors accounted for just one-third of the hedge fund industry’s assets. Today, they contribute two-thirds of the new money flowing into hedge funds.

[Related video: “Hedge Funds Embrace Banks’ Unwanted Risk”]

Aware they are competing with larger money management firms such as Blackstone and Fidelity, those firms already spend large sums on marketing. Hedge fund executives used to discussing their performance in private clubs and at high-society events have to adjust to a new reality – that publicly campaigning may open the gateway to a new investor pool.

Within General Solicitation and Advertising is embedded a much larger opportunity for investors and private funds. A draft proposal by Rep. Scott Garrett (R-N.J.), introduced in May 2014, seeks to fine-tune the new marketing freedoms for entrepreneurs in light of the new solicitation rules. He wants, for instance, to make it tougher for the SEC to cancel an entrepreneur’s offering in instances where regulators believe the company didn’t take reasonable steps to verify that investors meet net-worth standards.


Understanding the crisis remains important, and signs of renewed global growth could muffle calls for reform to the financial industry. Signs of economic recovery help people to pretend that there is nothing wrong, but the truth is, without true reform that turns economic growth over to the “crowd,” we are resting on our laurels to believe that the old way of finance will usher in a healthy global capital market.


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