In the United States, marketing to prospective investors in alternative investment funds can only be made in private communications. The use of general publicity is banned.
The United States’s Jumpstart Our Business Start-ups (JOBS) Act requires the Securities and Exchange Commission (SEC) to eliminate this ban so that any general advertising or other form of publicity can be used to promote an offering. This will be welcome news for any fund manager that plans to include the US in its fundraising activities. Under the current rules, fund managers cannot do anything that generally raises the profile of their fund. This is interpreted widely and includes referring to the fund in press releases, press articles, websites or public forums. Despite the proposed change, any investor has to be an “accredited investor”, and the ultimate impact remains uncertain until the SEC has revised its rules. The SEC has already missed the July 5 deadline for this, although rules are expected to be issued imminently. Individual state laws will still need to be onsidered, based on the location of any US investor.
Until the SEC rules have been finalised, the general ban on solicitation remains.
Private placement safe harbour
The US has much more stringent rules regarding private placements and public offerings than the UK. As a general rule, marketing an alternative investment fund to US investors may require registration under the US Securities Act 1933 unless it is exempt from registration. An exemption widely used by alternative investment funds, known as Regulation D, allows a private placement to take place where it is made to accredited investors. These include, for example, persons with individual net worth or joint worth with a spouse exceeding $1 million (€816,000), excluding the value of their primary residence, or entities in which all the equity owners are accredited investors.
For this safe harbour to apply, a fund, and all persons acting on its behalf cannot “generally solicit” investors during the marketing period. Those include a sponsor, fund manager, general partner or third-party retained to assist in the offering.
Violating the general solicitation rules may subject the fund to a mandatory cooling off period, as well as fines and penalties. The other potential ramifications are:
• Investigation by the SEC (which may create disclosure requirements to existing or prospective investors).
• The SEC shutting down the offering while it investigates.
• Investors having potential rescission rights on the basis that the conditions of the private offering exemption have not been met.
Expected changes under the Jobs Act
Elimination of general solicitation ban for private placements:
• The expectation is that the prohibitions on marketing will disappear so that a fund sponsor will soon be able to carry out marketing activities under the private placement safe harbour. Subject to the SEC's revised rules being issued, this will include the use of websites and social media to advertise, soliciting investors in investor meetings, talking to the press, reaching out to the market (and no longer needing a pre-existing relationship with investors), and more widely distributing private placement memoranda.
• Interests in funds can only be sold to accredited investors: the relaxation of the marketing rules will only apply under the Jobs Act when all of the investors are accredited. The fund sponsor will have to take reasonable steps to verify that purchasers of interests are accredited investors.
The SEC is also to adopt rules on how this verification should be done in practice.
Christine Ormond is a knowledge lawyer at Nabarro
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