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Rule change will stir marketing for unregistered securities

| Tuesday, July 23, 2013, 12:01 a.m.

Coming this fall: advertisements pitching the opportunity to buy into hedge funds, private equity funds or early-stage companies.

The Securities and Exchange Commission this month lifted a Depression-era ban against private companies advertising the sale of securities that don't have to be registered with regulators. The rule had been put in place to protect investors because such securities are considered risky investments.

Many entrepreneurs and young companies hailed the regulatory move, which will allow them to raise capital by pitching private offerings through tweets, email, print ads or other outlets.

“It's fantastic,” said Adam Lehman, president of Lotame, a data management company in Columbia, Md., that has raised several rounds of venture capital. The old rules, he said, “have been completely out of date and impractical.”

But consumer advocates are concerned that some investors won't fully understand the risks of investing in these private offerings and will get burned. Or worse, advocates warn, investors might fall for schemes by con artists.

Under the SEC rules, companies raising capital through ads can only sell securities to investors with a certain amount of assets or income, a sign that individuals are sophisticated enough to know what they are getting into — or at least can weather a loss.

The regulations are likely to take effect in September.

Eventually, the SEC is expected to issue regulations allowing even small investors to buy a stake in a private company through so-called crowdfunding. But for now, these latest SEC rules deal with only high-net-worth individuals.

The new rules will level the playing field for investors, said Lotame's Lehman. Today, institutional investors are in the loop about which private companies are raising money, he said. But accredited individual investors don't necessarily have access to that information.

The new SEC rules offer some investor protections, but they don't go far enough, said Barbara Roper, director of investor protection with the Consumer Federation of America.

For instance, the SEC said that “bad actors” — including felons convicted of a crime involving the sale of securities — won't be able to participate in these securities offerings. But that's only if those disqualifying acts occur after the new rules take effect. If crimes or other prohibited acts happened earlier, the information only has to be disclosed to investors.

“Who writes a rule that weak?” Roper said.

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