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For the first time, hedge funds will be allowed to advertise to the general public under a rule adopted Wednesday by federal regulators.

The Securities and Exchange Commission voted 4-1 to lift a decades-old ban that prevents hedge funds, private equity firms and other private investment managers from marketing their products to a wide audience.

Hedge funds are still allowed to sell securities only to an exclusive group of investors: those with a net worth of at least $1 million excluding their primary residence, or annual income of more than $200,000 in each of the two most recent years. About 7.4% of U.S. households have a net worth of $1 million or more.

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The change, which takes effect in about 60 days, was mandated by legislation enacted last year. The law also makes it easier for small startup companies to raise capital without having to comply immediately with SEC reporting rules.

The ban on general advertising has been in effect since 1933, during the Great Depression.

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Companies and funds must verify that investors meet the financial requirements for the investments. And the SEC adopted a rule that bars convicted felons and individuals sanctioned by federal securities and banking regulators from participating in offerings.

Investor advocates have expressed concern that allowing hedge funds and similar investments to advertise could increase the potential for fraud.

It “will make fraud easier by allowing fraudsters to cast a wider net for victims,” Commissioner Luis Aguilar said at the meeting. His was the only commissioner to dissent.

Read: SEC charges hedge fund managers with fraud

The SEC proposed to monitor the advertising and collect data on how it affects the market for private securities offerings.

Reaction from NASAA

Heath Absure, president of the North American Securities Administrators Association, said lifting the ban “needlessly puts investors in harm’s way.”

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He added, “The decision to lift the ban without simultaneous adoption of appropriate limits, guidance and investor protections for the most common product leading to enforcement actions by state securities regulators underscores the prospect that investors and issuers alike will be exposed to an indeterminate gap in protection.

“We therefore strongly urge the SEC to move as expeditiously as possible to adopt the proposed amendments to Regulation D and Form D.”

Separate rule

On a 3-2 vote, the SEC advanced a separate rule that would require companies selling shares of hedge funds or other private investments to notify the agency 15 days before a sale and also after the sale is completed. Companies and funds also would have to provide detailed information about the types of investors who purchased the shares and how their financial qualifications were verified.

Read: 4 facts about hedge funds

Republican Commissioners Troy Paredes and Daniel Gallagher voted against the proposal requiring advance notice of a sale. The public has 60 days to comment on. After that, the agency can take it up for a final vote.

Originally published on Advisor.ca
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