The SEC Ban on General Solicitation is Gone

The U.S. Securities and Exchange Commission’s (SEC) ban on general solicitation is gone. Some might precede the recent news with a “finally,” with the SEC voting on July 10th to get rid of the unnecessary general solicitation ban on solicitation to accredited investors. The news was met with general relief and excitement, although some industry insiders worried about unintended consequences.  In addition, paternalistic government advocates generally continue to be unhappy, with their reasoning being that the new rules open the door to greater fraud and other types of financial swindling (the current SEC commission is one of these types of groups).

Lifting of the ban does pose the question: how might it affect the private equity industry (here’s a brief look at how the SEC decision might affect the hedge fund industry)? On the surface, private equity professionals might say to themselves “This doesn’t affect us – we only invest in already established industries with money from big pension funds, large investors, or large institutions.  This small scale stuff doesn’t matter.” However, when digging into the details, private equity professionals in-the-know are paying attention to this issue because this regulatory action could affect the industry’s bottom line.  It may not be immediate or direct, but it will likely pose challenges to executives within the industry over time, with almost all of the induced changes being unknown unknowns (as opposed to known unknowns).

With this background in mind, here are two potential challenges eliminating the general solicitation ban may have on the private equity industry. The first deals with competition.  As with most industries, the financial industry has inter-sector and intra-sector competition, and this competition is fierce.  By opening the door to accredited investor solicitations, the private equity industry will likely face marketing competition from other industries that previously had a solicitation ban as well.  Essentially, there will likely be greater competition for investment dollars from hedge funds and venture capital firms, among others.  Since the private equity business can be more network-driven than these other two, private equity may have the most downside risk associated with this issue than any other financial sector.

The second is a potential shift in funding to earlier stages of the investment pyramid.  The thought goes as follows: should the marketing ban increase the amount of funds individuals invest with venture capital and other early-stage investment companies, the venture capitalists may be able to avoid having to worry about early-stage private equity firms.  Additionally, venture capitalists and hedge funds may begin to act more like private equity firms under certain circumstances.

By eliminating unnecessary regulations related to general solicitation of accredited investors, the SEC finally took action on implementing a key component of the Jumpstart Our Business Startup Act .  Depending upon how things shake out, the action could have a direct or indirect effect on the private equity industry’s bottom line for the foreseeable future.