After almost a year of waiting, the Securities and Exchange Commission finally approved a rule last week that could have a significant impact on the communications industry.
The rule, which was included as part of last year's Jumpstart Our Business Startups Act (JOBS Act), now allows small business and certain private partnerships, including hedge funds and private equity firms, to market themselves to outside investors for the first time in 80 years. The rule was designed to give these groups access to outside capital that they could then use to expand their businesses, create new jobs, and help bolster the economy. Hence the name: JOBS Act.
Those in the financial communications world have been following this rule closely. Now that it's officially in place, there are a few major areas worth focusing on.
1) Times Square billboard? Not so fast: The notion that every hedge fund under the sun is going to bombard consumers with advertisements simply isn't realistic. There will certainly be funds that will test the waters, and this will evolve over time as firms become more comfortable with various forms of advertising, but don't expect to see ads on Good Morning America quite yet. For starters, only “accredited” investors are allowed to invest in these funds, and that group makes up only 7% of the US population, so mass marketing simply isn't an effective strategy.
2) A win for the little guys: For the majority of large hedge funds and private equity firms, including several of our clients, not much will change. These funds have a strong, existing network among high-net-worth and institutional investors, so they already have access to outside capital. However, the fundraising environment for small and emerging funds is extremely more difficult, and this new rule gives them an opportunity to reach out to investors in ways they weren't allowed to before. I've spoken with several such managers over the last year, and they've been waiting patiently for this rule to be passed.
3) Not just hedge funds: Since the rule was first proposed, most of the media coverage has focused on the hedge-fund industry. While hedge funds are certainly a central group in this debate, the rule applies well beyond Wall Street and will impact entrepreneurs and start-up companies in dozens of industries. Tech companies will likely continue to rely on VCs for money, so I don't foresee a big change there, but there are hundreds of thousands of small companies that can now raise outside money to help grow their businesses. I simply can't stress enough how much of a game changer this could be. This will have a huge impact beyond the financial services industry.
4) Beyond advertising: Though traditional advertising is part of the discussion, the less-covered aspects of the rule are where I really see opportunities for financial PR pros. Until now, hedge-fund and private-equity managers have been under strong scrutiny for what they say publically. Many of them have avoided even the most basic forms of communication out of fear of running afoul of regulators. Now, though, managers can feel more comfortable speaking with the press about their investment approach, giving them freedom to promote their funds and gain exposure to investors they previously couldn't reach. And this goes beyond traditional media relations. For years, many funds either didn't have a website or it was merely a placeholder, offering visitors little to no information and adding zero value. Now they can update their sites, post video interviews with senior management, link to company and industry news, launch a social media presence (which deserves its own column entirely), etc. Advertising is only one piece of a very large puzzle.
5) Expect changes: A concern among politicians and consumer-protection groups is that investors could now be at a greater risk for fraud, which would further undermine the public's trust in a financial services industry that has already seen its share of reputational damage. Regulators left several areas of the rule unresolved, so it's possible they'll modify this as time goes on. As such, financial PR and IR pros should closely monitor this over the next few months and take ownership of this rule. The more you can educate your clients on this issue, the more they'll view you as a trusted adviser and member of their team.