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 Inc., 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.