How Does the JOBS Act Impact Social Media and Hedge Funds?
When the federal Jumpstart Our Business Startups (JOBS) Act went into effect in 2013, supporters hailed it as a milestone for the financial industry and investors alike.
One of the things the law did was loosen longstanding rules that restricted the ability of hedge funds and other investment companies to promote their private placements to the public. Advertising such investments to the general public had been barred before JOBS.
Now hedgies can market these securities across a broad range of advertising channels, including social media. The rules restricting participation in such placements to qualified investors still stand, with the funds required to take reasonable steps to verify the investors' qualifications. The criteria are defined as follows:
■ An individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence.
■ An individual annual income that exceeded $200,00() in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.
WHO WANTS TO BUY A PLACEMENT?
What, you say? You haven't seen pro football players on television commercials lately plugging placements as they would SUVs or fast food? And you haven't gotten pitches for the same investments via social media?
FIGURE 37.1 Private Placement Data from SEC
Don't be surprised. Industry insiders say it could take some time before financial professionals have digested the rules enough to feel comfortable with promoting securities in a new way. There already are complaints that some of the new regulations conflict with others that have been on the books for some time and have been enforced by other government agencies. See Figure 37.1.
And there's also the natural tendency of firms to not stick their necks out, but wait for others to jump into the placement promotion pool and see how cold the water really is.
Some hedge funds already are moving. TopTurn Capital produced a nearly three-minute ad in 2013 promoting its services. Meanwhile, ff Venture Capital is among the first companies in its channel to use general solicitation of investors post-JOBS Act; the firm already has more than 5,000 followers on Twitter.
One thing people in the business agree upon is that social media is a channel they want to participate in to a greater degree, if for no other reason than their clients are using social media themselves.
Daniel Schreck, head of marketing at Equinox Partners, which manages $1.5 billion, says it's “a great disappointment” that it can't advertise or do general solicitation despite the JOBS Act. Schreck says there are solicitation rule conflicts between the Commodities Futures Trading Commission
(Equinox trades commodities) and the SEC, which rewrote its rules to conform with JOBS mandates.
Schreck had hoped, among other things, to do a public website and some targeted advertising, but has put those plans on the shelf for now until the dust settles over what his firm will be allowed to do. The hedge fund industry is moving slowly as well, for similar reasons, he adds. It's nothing new; even in Europe regulators can make it difficult for companies outside the continent to invest within its borders.
Equinox's goal was to have a comprehensive public website where it could have its investors all share links to the firm's videos or newsletters with friends and colleagues, and effectively serve as marketers of the company. “That's how every other company works,” Schreck says. Still, Equinox's target audience is deeply niched; with a $5 million minimum investment, its securities are a luxury product, “so we try to be very selective, concise, and engaging in the communication we put out,” he says.
Schreck looks forward to a day when he can do more on social media. “With the JOBS act and changes to marketing, we want to be a first mover and pioneer,” he says. “We have a good product, we know the audience, and now we want a more robust and creative distribution channel. Moreover, people will develop innovative online tools to reach a broader target market.”
-  Mariah Summers, “Here's The First Ever Hedge Fund Ad, Complete With A Professional Surfer,” Buzzfeed, December 13, 2013, buzzfeed.com/mariahsummers/ heres-the-first-ever-hedge-fund-ad.
-  John Frankel, “Pioneering a New Frontier for Venture Capital,” ff Venture Capital, October 11, 2013, ffvc.com/blog/2013/10/ll/pioneering-new-frontier-venture- capital.