The SEC has just opened the door for broad public marketing of investments from start-ups, hedge funds and private equity firms, breaking a taboo that has been in place for 80 years. No, we’re not likely to see Henry Kravis pitch buyout funds on late-night television alongside ads for pizza and discount furniture. But some things will change. Here’s a look at five.
The new rule will allow small businesses to use advertising to raise money through securities offerings, and will also permit hedge funds and buyout firms to promote their products to the general public, though investors must be “accredited” according to minimum net-worth and income criteria.
Here are five observations on how the rule could affect marketing and communications in the financial sector:
1. Targeted marketing campaigns. The new rule probably won’t start a land rush by investment firms for advertising space in major newspapers or television. That’s simply too expensive and inefficient for the narrow audience of wealthy individuals they want to reach. They’re more likely to use a targeted strategy using direct mail and digital marketing, in much the same way that a specialized consumer product would be marketed.
2. Greater use of public relations. One part of the marketing mix for these offerings will surely be public relations. It’s cheap and very effective. Existing rules have kept private firms from using PR strategies, but that will change. One of the many uncertainties, of course, is how media coverage would be treated under the rule, which requires an issuer to notify the SEC of any marketing 15 days in advance. News features happen in unpredictable ways, but usually much faster than that.
3. New faces at financial conferences. The new rule is generally good news for advertising managers, conference organizers and financial media properties. There’s likely to be more demand for their services as private issuers take tentative steps into the marketing realm. They’ll now have more interesting things to say, too, on topics like fund performance, investment goals and future outlook.
4. Wild performance numbers. Fund managers will be free at last to speak publicly about their past performance. Like the children of Garrison Keillor’s Lake Wobegon, every fund will be “above average,” at least in the eyes of its manager. It would be good if firms (and the news media they’ll now be speaking to) begin to use consistent methodologies when speaking about performance. Standards developed by the Institutional Limited Partner Association (ILPA) would be a good start. Without them, confusion and puffery will reign.
5. Headaches for private client advisors. Firms that help wealthy individuals with their money probably aren’t too happy about this rule. That’s because their clients will be on the receiving end of these new marketing campaigns, and some will be very aggressive. Clients will turn to their advisors to understand if they are qualified to invest and if the offerings are worth the risk. Neither question is easy to answer, nor will advisors be paid for their extra labor (unless, of course, their firm is handling the offering). For these firms, good communication – both internally and to their clients – will be very important.
The SEC has begun a grand experiment, and it will be interesting to watch how firms make use of the new rule. Caution will rule, but the investment landscape will be very different in the years ahead.