An 80-year-old tradition of silence among issuers of private offerings is coming to an end, as SEC officials finish rules lifting a ban against solicitation and general advertising during periods of fundraising.
The ban's demise was part of the Jumpstart Our Business Startups Act signed in April 2012 by President Barack Obama. At that time, few private fund issuers and managers were plotting major media campaigns. But a year later — with the rules expected in the coming weeks — some are definitely considering the possibilities.
“These are brand-enhancement opportunities,” said Steven Nadel, a partner in law firm Seward & Kissel LLP's investment management group, New York. Mr. Nadel's clients include hedge funds, private equity companies, funds of funds and venture capital firms. “Nobody thinks that the JOBS Act means that you can take out an ad on the Internet; it's so much more than that. It will allow you to cold-call, to appear on CNBC, to be quoted, and to have a website that's not password protected. We've had a lot of discussions with managers.”
Under existing safe-harbor rules in place since 1933, private funds could not engage in general solicitation, which has been interpreted over the years to include talking about fundraising or performance to new investors or in public venues. Running afoul of that triggered a cooling-off period and other censures to be avoided at all costs.
Living without that restriction could allow simple steps like being able to mention a hedge fund by name on a corporate website or in marketing materials, or more high-profile moves such as sponsoring conferences or asset-class-specific industry events during fundraising periods.
“The prudent manager is going to find a way to hone and deliver their message,” said Richard Morris, a partner at law firm Herrick, Feinstein LLP, New York, who works with middle-market funds and expects to see them using social media to distribute information. “The canvas of how you present your fund is changing, and people should be embracing the change. This enables you to provide more information in a cleaner, crisper way. If you don't, you're going to get lapped.”
Some of the expected trendsetters include firms like BlackRock (BLK) Inc. (BLK), which has institutional and retail clients and deep pockets. The prohibition “has unnecessarily limited the methods by which issuers can reach sophisticated investors,” BlackRock's Barbara Novick, vice chairwoman and head of government relations, wrote in an SEC comment letter in October.
The brand matters
When it comes to wooing institutional clients, “brand matters,” said Thomas Walek, whose public relations firm Walek & Associates in New York counts hedge fund and private equity managers among its clients. He expects some private fund managers will embrace the change slowly, if ever, but “for those that want new areas of growth or to apply their asset management expertise to different pools of assets, this is a very exciting time,” said Mr. Walek.
Firms considered likely to embrace the new freedoms are midlevel managers eager to raise their profiles with institutional clients and to raise capital. “If you have firms that are on the margin and they want to be seen, I think it potentially makes sense, if you can do targeted marketing,” said John Roth, general counsel and chief compliance officer for Venor Capital Management LP in New York, a credit opportunity hedge fund manager with $1 billion under management.
While Venor Capital is waiting for the SEC rules before making plans, “it will be one less thing I have to worry about, “ he said. “But, you're still subject to anti-fraud rules. There will still be speed bumps.”
Having more information available is also going to change the role of investment consultants. “We're going to do more work separating fact from misdirection, but that's OK, it's our job,” said Timothy Barron, chief investment officer and senior vice president for Segal Rogerscasey in Darien, Conn. “There's likely to be increased transparency and broadened information flow, which is a positive thing,” he added, noting that advertising and educational conferences can be “efficient selling.”
Daniel Celeghin, a partner with Casey, Quirk & Associates LLC in Darien, Conn., a consultant to money managers, does not expect a rush of activity aimed at the institutional market, but thinks it “is very feasible that small (pension funds) will call their consultants. Will it lead to an investment? I think that's really unlikely,” said Mr. Celeghin.
Michael Harrell, partner in the private equity practice of law firm Debevoise & Plimpton LLP in New York, is also dubious. “There is not much upside, and some downside, to seeking institutional investors using the Internet or issuing press releases about a fund launch” which could attract the attention of state or overseas regulators, said Mr. Harrell. “A handful of private equity firms are thinking about it, but for the most part clients are telling us that they're not planning to take advantage of it when it is adopted.”
But Debevoise securities partner Matthew Kaplan welcomes having the ban removed. “At a minimum, it does eliminate the "foot fault' issue,” said Mr. Kaplan.
Many private fund managers and their advisers first want to see the final SEC regulations outlining how such activity can be conducted and what verification standards for accredited investors will be involved. The AFL-CIO and some consumer groups are pushing the SEC to start over, arguing the rulemaking is being rushed through in defiance of the agency's own regulatory process.
Brandon Rees is acting director of the AFL-CIO's Office of Investment, which represents $480 billion in union-sponsored multiemployer pension fund assets and the $3 billion AFL-CIO Equity Index Fund. He noted that the lack of public comment and economic impact analysis have delayed some rules ordered by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which preceded the JOBS Act by two years. “It's a double standard that seems patently unfair to investors,” said Mr. Rees.
“The ability for private equity and hedge funds to solicit institutional investors is a whole new world. I think there is danger for greater mischief. There are plenty of institutional investors that have made poor investment decisions.”
Jeff Mahoney, general counsel of the Council of Institutional Investors in Washington, also worries “if the lack of investor protections results in an increase in retail fraud, which lowers investor confidence in the markets and lowers returns for long-term institutional investors.”
With some prodding from Congress, new SEC Chairwoman Mary Jo White publicly has declared it a priority to get final rules out this year, a move applauded by industry groups like the Managed Funds Association in Washington, which has 3,000 global hedge fund member firms. “It's hard to argue against technology or transparency or more competition,” said Stewart Kaswell, MFA executive vice president and general counsel.” That's why we're urging the SEC to move forward.”
When the rules do come out, Anthony Scaramucci, founder and managing partner of SkyBridge Capital LLC, New York, a hedge fund seeder, is ready to lead the charge. “I am a big believer in lifting the perception of the industry,” said Mr. Scaramucci. “We'll be in heavy wind at the front of the bow, but I do believe that the rest of the people are coming with us. “ n
This article originally appeared in the May 13, 2013 print issue as, "Buzz on advertising rising as regs near".