While there probably won't be billboards with alternative investment executives beaming down on expressways as a consequence of SEC marketing rule proposals, firms could be free to discuss new funds while they are being raised.
A little-discussed part of the new proposals, aimed at implementing the mandates of the Jumpstart Our Business Startups Act signed by President Barack Obama on April 5, would end previous rules from the Securities and Exchange Commission that barred issuers of private offerings — which includes all managers with private placement investment funds — from discussing funds or performance while in fundraising mode, attorneys say.
The JOBS Act eliminated the prohibition against solicitation and general advertising in offerings of private placement securities, including private funds. On Aug. 29, the SEC proposed amendments to the rules to implement that portion of the JOBS Act. The rules, which among other things loosen marketing restrictions, are out for comment.
The comment period for all of the new rules stemming from the JOBS Act, including marketing and initial public offerings, will end Oct. 5.
If the SEC rules are enacted as proposed, alternatives managers no longer will live in fear that a stray comment at a conference or a mention by an investor would cause the Securities and Exchange Commission to halt fundraising.
As long as alternative investment managers have taken the steps to otherwise comply with requirements and have a reasonable belief that all of the investors who come into the fund are accredited investors, they can conduct a general solicitation under the proposed rules, said Jason Ment, partner, general counsel and chief compliance officer in the New York office of private equity consulting and investment management firm StepStone LLC.
This will open up a large number of opportunities for managers. Not only can they talk about funds they are raising, but they can ask for investments in their new funds on their websites and distribute materials about their new funds at conferences.
Managers can “have a message on their website that in effect says, "If you are interested in investing in our fund, please give us a ring,'” Mr. Ment added.
And, of particular interest to the financial media, managers can confirm to reporters that they are fundraising and the amount they raised in the fund's first close, Mr. Ment said.
“Under the existing safe-harbor rules, a fund cannot have a general solicitation. Confirming a market rumor, talking about fundraising and talking to a potential investor you didn't already know and had not cleared as a qualified purchaser, could be considered a general solicitation,” Mr. Ment said. “If a manager blew their private placement, they would have to have a cooling-off period, which is crippling to the momentum of fundraising.” No specific length for the cooling-off period was specified in the old rules.
Freeing up the discussions is critical right now, insiders say, because of the difficult fundraising environment — even tougher than 2010. Managers are attempting to raise 1,878 private equity funds, according to Preqin, a London-based alternative investment research firm. A small fraction of those have closed. In the second quarter, 126 private equity funds reached a close with a total of $61.4 billion raised, down from 167 funds closed on a collective $68.1 billion in the first quarter.
These days, most institutional investors won't even consider a fund until it's had its first close. Should the rules as currently written be enacted, managers can crow about the capital they have managed to snag, which would be a huge fundraising advantage, insiders say.
“If the rules are adopted as proposed, it will open up the ability of fund sponsors to be a little more forthcoming in how they approach investors and engage in advertising which they have never done before,” said Lawrence J. Hass, partner, corporate department and head of the private investment funds practice in the New York office of law firm Paul Hastings LLP.
Under the old rules, managers could approach only investors with whom they already had a “substantial prior relationship,” Mr. Hass said. This meant that managers had to meet with a new investor once, to talk about anything but their new fund, before setting up another meeting to discuss the manager's new investment fund.
“Now managers could speak to investors they have never spoken with before,” Mr. Hass said.
The new rules could also allow managers for the first time to use the Internet to contact investors, he said.
There is a downside to the looser requirements under the proposed rules, Mr. Ment said. Under the proposed rules, managers will be responsible for having a reasonable belief that investors are accredited. They would no longer be able to rely on the investor's signed representation that they are accredited investors and they have the financial wherewithal to invest in the manager's fund, he explained.
“The quid pro quo for being able to conduct a general solicitation is that the issuer has to take steps to verify that the investor is accredited, such as asking for a W-2 or the front page of a tax return,” Mr. Ment said.
The SEC could end up offering additional guidance around what steps managers would have to take from the regulator's perspective to ensure the investor is accredited, he said.
A special bulletin published by law firm Stroock & Stroock & Lavan LLP noted that how a manager solicits investors will be important in determining if those investors are accredited. “If the offering is conducted through e-mail or social media, it will likely require more verification than if new investors are solicited through a prescreened database monitored by a reliable third party,” the bulletin notes.
Some insiders think the rules are being relaxed because they have become outdated in today's digital age.
“It seems to me, with current technology and with the access to media that people have today ... it is difficult to not publicly provide some sort of public acknowledgement of your fundraising activities,” said Laurence Bronska, partner, co-head of private equity practice in the Chicago office of law firm McDermott Will & Emery LLP.
But industry observers don't expect managers to launch large advertising campaigns anytime soon.
“Why you won't see an outpouring of retail-type advertising is the anti-fraud rules under the securities laws and the Investment Advisers Act rules have not gone away,” Mr. Ment said.
Both laws generally impose a duty to be truthful and not omit material facts or information when the omission would make its statements misleading. The Investment Advisers Act also has guidance on advertising including use of testimonials, fee presentations and performance presentations, among other things. n
This article originally appeared in the October 1, 2012 print issue as, "JOBS Act gives new voice to managers".