Removing the hedge fund advertising ban will serve to “flatten the playing field,” says April Rudin, chief executive and founder, The Rudin Group.

As reported last week,
the Securities and Exchange Commission will on Wednesday vote to lift - as
required by the 2012 Jumpstart Our Business Startups Act - an 80-year-old ban
that bars the general solicitation and advertising in certain private securities
offerings.

Hedge funds will only
be able to accept funds from “accredited” investors with a net worth of at
least $1 million, or who earn at least $200,000 a year, but critics argue that
removing the advertising ban will expose small and/or inexperienced investors to fraud as a
result of loosened investment protections.

However, it will also
serve to “flatten the playing field,” says April Rudin, chief executive and
founder, The Rudin Group.

“Larger funds
typically sell on track record and return, so I think what this new provision
will do is to flatten the playing field between larger, more established funds,
and smaller emerging funds,” she said.

Opening the advertising gates

Under the Securities
Act of 1933, hedge funds are in the Regulation D category, deemed “risky”
investments. The aim of the Act, established after the stock market crash and
during the Great Depression in the US, was to essentially protect investors
from themselves.

“The notion was that,
unless people had enough money to lose, they would be banned from being able to
invest and make these ‘risky’ investments,” Rudin said.

For years, hedge funds
and other Regulation D investments relied on a system called “cap intro,” whereby
investors would be introduced to such a vehicle via an accountant or attorney,
who would in turn “accredit” them. 

Rudin cited Bernard
Madoff as an example of the impact this has had on the US, saying it was the
“scarcity” and “closed-ness” which made people want to be part of his funds.

“I think that has set
the landscape in the US for how people view accredited investors. It’s been an
undercurrent of people that are referring others to these particular
investments,” she said.

And for this reason, it
could be perceived as a somewhat “disparate” law.

“Someone like Kim
Kardashian who has lost tonnes of money in private equity deals and has many
advisors...has access to these investments as an accredited investor, while
some smart hedge fund manager, investment banker or younger person - who is
just starting out and who may have a degree in finance - does understand, but
isn’t allowed,” Rudin said.

She believes a further
shift in landscape is likely if hedge funds are given the green light to
advertise, with marketing to the next generation of investors being one
particular area worth acknowledging.

Emerging investors
won’t be interested in a hedge fund with a complicated strategy that they don’t
understand - especially at a time when advertising extends itself into social
media and the internet, among other growing channels, Rudin said.

“Smaller
funds will have a new opportunity as the playing field gets leveled; they’ll be
able to use platforms like social media, which are not expensive, and affinity
groups and communities where high net worth investors and next-geners will find
them,” Rudin continued.

She added: “From the
standpoint of brand-building, you want to be able to explain your investment
strategy in a clear, easy way - you can’t have a 45-minute infomercial.”

An opportunity? 

Another major impact
is apparent when thinking about the change in the advertisement of prescription
drugs.

Rudin explained:
“First, manufacturers were only able to advertise to dispensing physicians, and
then later allowed to directly market to consumers. This meant that patients
who once relied on professional advice now could ‘diagnose themselves’ and
start asking for a prescription drug by name. ‘I can’t sleep, patients now say. ‘I need Ambien.’ Now, potentially, your clients will call
you and bypass your advice and demand to be invested in a particular hedge
fund, the advertisement of which has caught their eye.”

She noted that it is
“crazy” how so few family offices and wealth managers have actually told any of
their clients about the looming reform.

“Because people have
said they didn’t know it was a law, thinking ‘it hasn’t been passed’ or ‘it’ll
never happen’…There has been much burying of heads in the sand,” Rudin said, adding
that the call to action now is to communicate with clients ahead of time to let
them know these ads are coming.

“Potentially, I see
that during the 2014 Super Bowl instead of Doritos and beer ads, it could be
hedge funds,” she quipped. “However, just because they can do it, it doesn’t mean they can do it right or do it well - and
that’s another big opportunity.”