The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Regulation D

  • From Vol. 10 No.9 (Mar. 2, 2017)

    Acting SEC Chair Emphasizes Agency Will Protect the “Forgotten Investor” 

    The SEC has a number of clearly defined priorities for 2017 and beyond, including a strong commitment to protecting those who fall under the rubric of the “forgotten investor.” In the interest of protecting smaller investors, it is appropriate for the agency to reexamine and revise outdated notions about different investment options being suitable for different types of investors. It may also be time for the SEC to eliminate rules prohibiting non-accredited investors from accessing certain opportunities and risk-mitigation tactics that accredited investors have freely used for decades. All of these points were conveyed in a speech delivered by acting SEC Chair Michael Piwowar at the “SEC Speaks Conference 2017,” dedicated to the theme “Remembering the Forgotten Investor.” This article explores the principal takeaways from Piwowar’s speech, providing managers with key insight into the SEC’s priorities and potential direction under President Trump’s administration. For HFLR coverage of a prior SEC Speaks event, see “SEC Commissioner Calls for Increased Transparency and Accountability in Capital Markets” (Mar. 3, 2016). For a summary of SEC examination priorities for 2017, see “OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity” (Jan. 26, 2017). For analysis of a speech on SEC enforcement priorities by former SEC Chair Mary Jo White, see “Outgoing SEC Chair Outlines New Model for Enforcement Priorities in 2017 and Beyond” (Jan. 12, 2017). 

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  • From Vol. 9 No.23 (Jun. 9, 2016)

    SEC Staff Discuss “General Solicitation” and Other Regulation D Issues

    Many hedge fund managers raise capital from investors in private offerings conducted under Regulation D. At its public meeting held on May 18, 2016, the SEC Advisory Committee on Small and Emerging Companies addressed a number of issues regarding the JOBS Act changes to the private offering rules under Regulation D of the Securities Act of 1933, with emphasis on what constitutes “general solicitation”; verification of accredited investor status; the impact of those changes on angel investing; and enforcement of the revised rules. The session featured input from David Fredrickson, Chief Counsel and Associate Director of the SEC Division of Corporation Finance; Sebastian Gomez Abero, of that Division’s Office of Small Business Policy; and Margaret Cain, a microcap specialist in the Office of Market Intelligence of the SEC Division of Enforcement. This article presents the takeaways from the session most valuable to hedge fund managers relying on Regulation D to raise capital. For additional coverage of the SEC’s public meeting, see “SEC Commissioners and Staff Discuss Possible Amendments to Definition of Accredited Investor” (Jun. 2, 2016). For more on general solicitations under Regulation D, see “What Hedge Fund Managers Need to Know About Recent SEC Guidance on Substantive, Pre-Existing Relationships and Internet Use” (Oct. 15, 2015); and “SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising” (Jul. 18, 2013).

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  • From Vol. 9 No.22 (Jun. 2, 2016)

    SEC Commissioners and Staff Discuss Possible Amendments to Definition of Accredited Investor

    Many hedge fund and other private fund managers rely on the private offering safe harbor set forth in Rule 506 of Regulation D, a fundamental benefit of which is that the issuer may offer securities to an unlimited number of “accredited investors.” Last year, after a staff review and consultation with its Advisory Committee on Small and Emerging Companies (Committee), the SEC issued a “Report on the Review of the Definition of ‘Accredited Investor’” (Report). On May 18, 2016, the SEC broadcast a public meeting of the Committee, at which SEC Chair Mary Jo White and Commissioners Michael Piwowar and Kara M. Stein, along with members of the SEC Office of Small Business Policy (part of the Division of Corporation Finance), discussed the Report with Committee members. This article summarizes the principal points raised during the meeting. For other recommendations regarding the definition of accredited investor, see “What Do the Investor Advisory Committee’s Recommendations Mean for the Future of Marketing of Hedge Funds to Natural Persons?” (Oct. 24, 2014); and “Best Practices for Ensuring That Only Accredited Investors Participate in Publicly Advertised Private Offerings by Hedge Funds (Part Two of Three)” (Oct. 17, 2014).

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  • From Vol. 9 No.3 (Jan. 21, 2016)

    Despite His “Bad Acts,” Issuers Beneficially Owned by Steven A. Cohen Are Not Precluded From Private Offerings Based on the Bad Actor Rule

    Steven A. Cohen, the billionaire founder of S.A.C. Capital Advisors, LLC, has settled SEC charges that he failed reasonably to supervise Matthew Martoma, a portfolio manager who engaged in insider trading in shares of two pharmaceutical companies. The SEC charged that “Cohen received information that should have caused him to take prompt action to determine whether an employee under his supervision was engaged in unlawful conduct and to prevent violations of the federal securities laws. Cohen failed to take reasonable steps to investigate and prevent such a violation.” See “SEC Charges Steven A. Cohen With Failing to Supervise Employees Who Allegedly Engaged in Insider Trading” (Jul. 25, 2013). This article summarizes the terms of the settlement and the related SEC no-action letter regarding the ability of entities beneficially owned by Cohen and his funds to continue to rely on Rule 506(b) or (c) of Regulation D for private placements despite the “bad actor” rule set forth in Rule 506(d). See also “Defense White Paper Refutes SEC’s Allegations That Steven A. Cohen Failed to Supervise Employees Accused of Insider Trading and Provides a Behind-the-Scenes Look at SAC Capital’s Compliance Program and Culture” (Jul. 25, 2013).

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  • From Vol. 8 No.40 (Oct. 15, 2015)

    What Hedge Fund Managers Need to Know About Recent SEC Guidance on Substantive, Pre-Existing Relationships and Internet Use

    On August 6, 2015, the staff of the SEC’s Corporation Finance Division issued Compliance and Disclosure Interpretations regarding general solicitations under Rule 506 of Regulation D under the Securities Act of 1933.  That guidance may change, endorse or liberalize certain hedge fund practices.  Separately, the SEC granted no-action relief to a firm using online qualification to establish a substantive, pre-existing relationship with an offeree.  Together, the guidance and no-action letter may alter some of the principles within which hedge funds and other private investment funds operate, potentially signifying a liberalization of how the SEC interprets the rules governing private offerings.  In a guest article, Steven M. Felsenthal, general counsel and chief compliance officer of Millburn Ridgefield Corporation, discusses the potential implications of the guidance and the no-action letter on the private investment fund industry.  Felsenthal will speak about marketing and compliance at the Ninth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM.  For more information about the Summit, click here.  To register for the Summit, click here, using the HFLR’s promotional code available in this article for a discount of $500 off the registration price.  For additional insight from Felsenthal, see “Further CFTC Harmonization of Rules for Hedge Funds: A Welcome and Continuing Trend,” The Hedge Fund Law Report, Vol. 7, No. 35 (Sep. 18, 2014); “What Do the CFTC Harmonization Rules Mean for Non-Mutual Fund Commodity Pools, Including Hedge Funds?,” The Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013); and “CFTC and SEC Propose Rules to Further Define the Term ‘Eligible Contract Participant’: Why Should Commodity Pool and Hedge Fund Managers Care?,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

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  • From Vol. 8 No.12 (Mar. 27, 2015)

    Five Steps That CCOs Can Take to Avoid Supervisory Liability, and Other Hedge Fund Manager CCO Best Practices

    Participants at FRA’s Private Investment Funds Compliance Master Class, held on February 17, 2015 in New York City, addressed testimonials and past-specific recommendations in hedge fund marketing; whether performance should be presented net or gross of fees; presenting performance under different fee structures; use, placement and monitoring of third-party news articles; broker registration of in-house marketers and marketing departments; reverse solicitation and remuneration under AIFMD; bad actor rule compliance; three theories of CCO liability; three categories of enforcement actions involving CCOs; and five steps that CCOs can take to avoid liability.  See also “Stroock Seminar Identifies Five Strategies for Mitigating the Risk of Supervisory Liability for Hedge Fund Manager CCOs,” The Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014).

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  • From Vol. 7 No.37 (Oct. 2, 2014)

    All-Star Panel at RCA PracticeEdge Session Analyzes Five Key Regulatory Challenges Facing Hedge Fund Managers

    A recent PracticeEdge session presented by the Regulatory Compliance Association (RCA) addressed five key regulatory issues facing hedge fund managers: Broker-dealer registration, the JOBS Act, alternative mutual funds, fiduciary duties and cybersecurity.  Matthew S. Eisenberg, a partner at Finn Dixon & Herling, moderated the discussion.  The speakers included Walter Zebrowski, principal of Hedgemony Partners and RCA Chairman; David W. Blass, at the time of the session, Chief Counsel and Associate Director of the SEC Division of Trading and Markets; Brendan Kalb, General Counsel of AQR Capital Management LLC; Scott D. Pomfret, Regulatory Counsel and Chief Compliance Officer of Highfields Capital Management LP; and D. Forest Wolfe, Chief Compliance Officer and General Counsel of Angelo, Gordon & Co.  As is customary, Blass offered his own opinions, not the official views of the SEC.  (Subsequent to the event, Blass was appointed general counsel of the Investment Company Institute.)  See also “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement? (Part Three of Three),” The Hedge Fund Law Report, Vol. 6, No. 37 (Sep. 26, 2013); Part Two and Part One.

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  • From Vol. 7 No.35 (Sep. 18, 2014)

    CFTC Allows Hedge Fund Managers to Advertise

    Private funds that are subject to regulation by the SEC may also constitute commodity pools within the meaning of the Commodity Exchange Act, which may subject them and their advisers to regulation by the CFTC.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  In accordance with the JOBS Act, the SEC issued new rules that lift the ban on general solicitation and general advertising by private fund sponsors under certain conditions.  See “A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  The CFTC did not follow suit, leaving managers of funds that trade in commodities in a bind, because general solicitation and general advertising render commodity pool operators ineligible for certain important exemptions from CFTC rules.  See “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).  Specifically, CFTC Regulation 4.7(b) provides registered commodity pool operators with relief from certain disclosure, reporting and recordkeeping requirements; and Regulation 4.13(a)(3) contains an exemption from registration as a commodity pool operator.  However, both regulations contain requirements that are inconsistent with the lifting of the ban on general solicitation and general advertising reflected in new SEC Rules 506(c) and 144A.  On September 9, 2014, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued exemptive relief to bring Regulations 4.7(b) and 4.13(a)(3) into line with those new SEC Rules.  This article summarizes the existing regulatory lay of the land and the key provisions of the relief.

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  • From Vol. 7 No.30 (Aug. 7, 2014)

    “Best Ideas” Conference Presentations: Challenges Faced by Hedge Fund Managers Under Federal Securities Law (Part One of Two)

    “Best ideas” conferences are events at which investment experts – often including hedge fund managers – make individual presentations or participate in panel discussions during which they share investment ideas, analysis and recommendations with fellow contributors and attendees.  Frequently, these conferences are organized for both educational and charitable purposes, and the net proceeds are donated to one or more non-profit organizations.  Managers who participate in these events likely do so for a variety of reasons: benefitting a particular charity, raising awareness of the attributes or shortcomings of a particular investment, sharing in the opportunity to participate in an exchange of insights with other leading professionals and demonstrating their research and/or analytical skills.  Naturally, information shared at a “best ideas” conference is available to anyone who attends.  Tickets are usually offered for sale on an unrestricted basis to the general investing public via an organizer’s website.  Accordingly, there are generally no controls over who will and will not be in attendance when information is presented.  Additionally, comments and statements made by presenters and panel members are often live-tweeted during the presentation or summarized by bloggers shortly after the presentation is concluded.  Finally, many organizers publish materials used by presenters – such as PowerPoint slides and graphs – to their websites during or soon after a conference has ended.  As a result, the information and materials that a manager prepares for the conference audience generally finds its way to a much broader, and potentially less sophisticated, consumer market.  The porous nature of this process raises a range of issues of concern for a hedge fund manager, from potential violations of general solicitation restrictions under Regulation D of the Securities Act of 1933, as amended, to compliance with antifraud and fiduciary duties under the Investment Advisers Act of 1940, as amended.  In a two-part guest article series, S. Brian Farmer, Co-Managing Partner of the Investment Management & Private Funds Practice Group at Hirschler Fleischer, and co-author John C. C. Byrne, II, identify the primary legal concerns raised by presentations at best ideas conferences and discuss how to address those concerns.  This article is the first in the series.

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  • From Vol. 7 No.30 (Aug. 7, 2014)

    SEC and SIFMA Offer Additional Guidance on Rule 506(c) Accredited Investor Status

    Hedge fund managers and other issuers who wish to offer securities in reliance on the exemption from registration set forth in Rule 506(c) of Regulation D under the Securities Act of 1933 (Securities Act), must take “reasonable steps” to verify that each of the investors is an “accredited investor.”  The main attraction of a Rule 506(c) offering is that it is not subject to the traditional ban on general solicitation and advertising in private offerings.  Rule 506(c) contains a number of safe harbors covering verification of accredited investor status.  In that regard, the SEC recently amended its Securities Act Rules Compliance and Disclosure Interpretations to clarify the calculation of income and net worth in determining accredited investor status and the applicability of the safe harbors relating to income and net worth.  In addition, the Securities Industry and Financial Markets Association recently offered guidance to registered broker-dealers and investment advisers on the determination of accredited investor status.  See also “SEC Provides Guidance on When the Bad Actor Rule Disqualifies Hedge Fund Managers from Generally Soliciting or Advertising,” The Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).

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  • From Vol. 7 No.30 (Aug. 7, 2014)

    Can Private Fund Marketing Be Automated?

    The Hedge Fund Law Report recently interviewed Alon Goren, CEO of INVST, an online platform for connecting private funds and investors.  The intent of the interview was to determine whether private fund marketing, or parts of it, can be automated, or at least facilitated, by technology.  In pursuit of an answer to this question, we discussed the following topics with Goren: what INVST does and its revenue model; how INVST confirms the accredited and qualified status of investors on the platform; compliance with the Lamp Technologies no-action letter and the JOBS Act; segments of the investor market on the platform; size and other characteristics of funds and managers on the platform; INVST’s interaction with third-party marketers and its place in the hedge fund marketing ecosystem; and whether INVST handles secondary market transactions in private fund interests.

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  • From Vol. 7 No.9 (Mar. 7, 2014)

    SEC Provides Guidance on When the Bad Actor Rule Disqualifies Hedge Fund Managers from Generally Soliciting or Advertising

    In July 2013, the SEC adopted final rules under the JOBS Act that permit hedge fund managers to generally solicit and advertise so long as (1) the manager reasonably believes that relevant investors are accredited, and (2) the principals of the management company and certain other persons are not “bad actors” as generally defined in the rules.  See “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).  Contrary to expectations in some quarters, the volume of hedge fund advertising following the relaxation of the ban on general solicitation and advertising has been modest.  See, e.g., “Seward & Kissel Study of 2013 Hedge Fund Launches Identifies Trends in Fees, Liquidity, Lockups, Structuring and Seed Investing,” The Hedge Fund Law Report, Vol. 7, No. 8 (Feb. 28, 2014).  The emerging industry consensus appears to be that the JOBS Act will make accomplished managers less reluctant to speak at conferences and otherwise present in public, but will not result in a material amount of retail advertising by managers.  If anything, traditional advertising by a manager may indicate that the manager is on the wrong side of the adverse selection divide, and, in that sense, may backfire.  In any case, even for managers contemplating the “middle road” of less guarded public pronouncements, the bad actor disqualification provisions are complex in application because of the expansiveness with which the SEC structured the provisions.  Recognizing the complexity – and endeavoring to mitigate it – the SEC has issued, starting in December 2013, a series of bad actor disqualification Compliance and Disclosure Interpretations (CDIs).  This article synthesizes the guidance from the CDIs with the most direct application to hedge fund managers.  See also “A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).

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  • From Vol. 6 No.47 (Dec. 12, 2013)

    Implications for Hedge Fund Managers of the SEC’s Recent Guidance on the Rule 506 Bad Actor Disqualification Provisions

    On December 4, 2013, the staff of the Division of Corporate Finance of the SEC published “Compliance and Disclosure Interpretations” (interpretative guidance) addressing the applicability of the recently-adopted “bad actor” disqualification provisions (Rules 506(d) and (506(e)) recently adopted by the SEC as part of its JOBS Act rulemaking.  See “SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising,” The Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).  The interpretative guidance addressed, among other things, the scope of covered persons and disqualifying events covered by the rules, acceptable due diligence measures that issuers can employ to avoid disqualification, guidance with respect to an issuer’s dealings with compensated solicitors to avoid disqualification, circumstances in which issuers need not and cannot seek waivers from application of Rule 506(d) and the scope of an issuer’s Rule 506(e) disclosure obligations.  The interpretations have numerous implications for hedge funds that seek to offer securities in reliance on Rule 506.  This article summarizes key takeaways from the interpretative guidance and outlines important implications for hedge fund issuers arising out of the guidance.  For additional insight on interpretation of the bad actor disqualification provisions, see “How Can Hedge Fund Managers Negotiate the Structuring, Operational and Due Diligence Challenges Posed by the Bad Actor Disqualification Provisions of Rule 506(d)?,” The Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013).

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  • From Vol. 6 No.39 (Oct. 11, 2013)

    How Can Hedge Fund Managers Negotiate the Structuring, Operational and Due Diligence Challenges Posed by the Bad Actor Disqualification Provisions of Rule 506(d)?

    Generally, rulemaking under the JOBS Act has relaxed decades-old restrictions on marketing by hedge fund managers.  See “A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  However, the JOBS Act rulemaking also added a new subsection (d) to Rule 506, which generally prohibits “bad actors” from accessing the expanded marketing rights under the JOBS Act.  Specifically, Rule 506(c) allows hedge fund managers to engage in general solicitation and advertising, but Rule 506(d) provides that hedge funds may not offer securities in reliance on Rule 506 if covered persons associated with the hedge fund (including the manager, distributors and certain investors, officers and directors) have engaged in specified misconduct.  See “SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising,” The Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).  For hedge fund managers that wish to partake of the expanded marketing opportunities offered by the JOBS Act, Rule 506(d) creates structuring, operational and due diligence challenges.  Some of those challenges are obvious from the face of the rule, for example, identifying covered persons within the management company.  Other challenges are less obvious but no less important.  For example, under what circumstances, if any, can sub-advisers or fund of funds investors constitute covered persons?  When and how should managers conduct a covered person analysis on their range of relationships?  How does Rule 506(d) interact with the manager’s hiring program?  Does the bad actor disqualification regime impact the negotiation of settlement agreements with the SEC and CFTC?  To address these and other challenging issues raised by Rule 506(d), The Hedge Fund Law Report recently interviewed Rory Cohen, currently a partner at Mayer Brown, formerly a managing director at Bear Stearns, and a practitioner with decades of experience in hedge fund and broker-dealer law, regulation and operations.  Our interview with Cohen – the full transcript of which is included in this article – was conducted in connection with the Regulatory Compliance Association’s upcoming Compliance, Risk & Enforcement 2013 Symposium, to be held at the Pierre Hotel in New York City on October 31, 2013.  For a fuller description of the Symposium, click here.  To register for the Symposium, click here.  Subscribers to The Hedge Fund Law Report are eligible for a registration discount.

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  • From Vol. 6 No.28 (Jul. 18, 2013)

    SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising

    When the JOBS Act (formally the Jumpstart Our Business Startups Act) was signed by President Obama last year, it directed that one of its most transformational provisions – the relaxation of decades-long limits on public offerings of unregistered securities – not go into effect until the Securities and Exchange Commission (SEC) set rules to implement the changes.  After more than a year of delay, the agency’s implementing rules are now here.  But the SEC at the same time proposed a raft of controversial additions to the new rules, ensuring that the politically charged debate around the JOBS Act – in which consumer advocates and certain lobbies (such as that for the mutual fund industry) vigorously oppose the law and its opportunities for private funds while many business groups push for it – will continue.  The awkward compromise offered by that two-step has nods to both sides of the debate.  On the one hand, the SEC rules reflect only one of many changes called for by JOBS Act opponents, that being some increase in procedures to confirm investor qualifications (this addition was expected, although the final guidance is more strongly worded than in the SEC’s original proposal from a year ago).  See “JOBS Act: Proposed SEC Rules Would Dramatically Change Marketing Landscape for Hedge Funds,” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012).  On the other hand, the SEC proposal now asks whether the agency should add a number of new requirements that will cheer the opposition.  Lest there be any mistake that the SEC is flashing a yellow light, the release also says that the agency’s examination staff will be charged with monitoring new offering activity in the private funds industry and that firms that expand their marketing profile should carefully consider their compliance infrastructure before doing so.  On the same day that the SEC adopted the JOBS Act rules, it also adopted new rules that foreclose reliance on Regulation D in the case of securities offerings involving felons and other “bad actors.”  In a guest article, Nathan J. Greene, a partner and Co-Practice Group Leader in the Investment Funds Group at Shearman & Sterling LLP, describes the above-referenced JOBS Act rulemaking in more detail and highlights important implications for hedge fund managers.

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  • From Vol. 5 No.24 (Jun. 14, 2012)

    How Can Hedge Fund Managers Both Advertise and Accept Investments from Non-Accredited Employees, Friends and Family Members?

    The Jumpstart Our Business Startups (JOBS) Act has been received by the hedge fund industry with cautious optimism.  Most notably, the JOBS Act eliminates the long-standing and hard-to-justify gag order prohibiting hedge fund managers from “generally soliciting,” or, in plain English, advertising.  The business benefits of advertising are obvious: communicating a value proposition; solidifying a brand; correcting misperceptions; etc.  However, the JOBS Act does not give something for nothing.  In exchange for the ability to advertise, hedge fund managers may only accept accredited investors into their funds.  See “Implications for Hedge Fund Managers of the Rule Amendments Recently Adopted by the SEC to Raise Accredited Investor Standards,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).  In the majority of circumstances, this is not an issue because the majority of investors are accredited.  But in an important minority of cases, this regime appears to require hedge fund managers to elect between advertising, on the one hand, and accepting non-accredited investors into their funds, on the other hand.  (Under Rule 506 of Regulation D, hedge fund managers may offer fund interests in a “private offering” – faster, cheaper and otherwise preferable to a “public offering” – to up to 35 non-accredited investors; and the JOBS Act does not change this part of the Rule.)  In turn, this matters because hedge fund managers sometimes have occasion to accept investments in their funds from non-accredited investors – persons such as family members, friends and lower-level employees.  While such “tickets” are typically small relative to institutional investments, they can be strategically important and even connected to institutional investments.  For example, many institutional investors like manager employees to have “skin in the game”; and this preference applies across the pecking order, to investments by star portfolio managers, operations and accounting professionals, compliance personnel, etc.  See “Investments by Hedge Fund Managers in Their Own Funds: Rationale, Amounts, Terms, Disclosure, Duty to Update and Verification,” The Hedge Fund Law Report, Vol. 3, No. 21 (May 28, 2010).  From the perspective of institutional investors focused on operational due diligence, there are no unimportant employees at a hedge fund manager.  Everyone should be invested, figuratively and, ideally, literally.  See “Legal and Operational Due Diligence Best Practices for Hedge Fund Investors,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).  So, the good news is that hedge fund managers can advertise.  The bad news appears to be that if managers advertise, they cannot accept investments from non-accredited friends, family members, employees and others, which can constitute a strategic impairment.  But hedge fund managers are not lawyers.  When confronted with two alternative options, lawyers – at least good ones – will do a thorough analysis and choose the better option.  Hedge fund managers will choose both.  Accordingly, to enable our hedge fund manager subscribers to get the best of both worlds, and to arm our attorney subscribers for conversations with managers, we have worked with sources to identify eight strategies for simultaneously advertising and accepting non-accredited investments.  Those strategies are detailed toward the end of this article.  To provide context for those strategies, this article also describes: Rule 506 and the mechanics of the JOBS Act; the impact of the JOBS Act on hedge funds and managers; the current accredited investor requirement; integration of securities offerings; and the status of SEC rulemaking under the JOBS Act.

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  • From Vol. 5 No.14 (Apr. 5, 2012)

    Implications of the JOBS Act for Hedge Fund Managers

    The President is expected to sign into law today the Jumpstart Our Business Startups (JOBS) Act, which could represent a positive development for many small businesses, including hedge funds, that generally seek to raise their profile within the capital markets and specifically seek to raise capital.  While it may still be premature to prognosticate the impact that the JOBS Act will have on hedge fund marketing and advertising because the SEC has not provided details regarding its anticipated rulemaking, hedge fund managers and their compliance staff should nonetheless be cognizant of the potential implications of this legislation on their businesses.  This article surveys some of these potential implications.

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  • From Vol. 5 No.5 (Feb. 2, 2012)

    Pressure Mounts for a Repeal of the Ban on General Solicitation and Advertising by Hedge Fund Managers

    Pressure appears to be mounting to repeal or relax the ban on general solicitation and general advertising applicable to hedge funds engaged in domestic private placements.  That ban has significantly constrained the ability of hedge fund managers to communicate with potential investors and others, but its repeal may have unanticipated consequences.  The impetus for the potential repeal comes from at least four quarters.  This article explains the mechanics of the ban; the four sources of pressure for a repeal; and the potential implications of a repeal for hedge fund managers, investors and others.

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  • From Vol. 2 No.17 (Apr. 30, 2009)

    Will the States Reassert Control over the Regulation of Private Offerings?

    Since passage of the Securities Act of 1933 and the Securities Exchange Act of 1934, regulation of public offerings of securities has largely been the province of federal, as opposed to state, regulators.  Just over 60 years after passage of those laws, Congress confirmed in the National Securities Markets Improvement Act of 1996 (NSMIA) that regulation of private offerings of securities would also fall primarily within the federal jurisdiction.  Specifically, NSMIA provides that the federal regulation of certain private offerings preempts state regulation, although states retain the authority to enforce anti-fraud rules in connection with such offerings.  That is, the federal government has ex ante regulatory authority, and the states have ex post anti-fraud enforcement authority.  To a growing chorus of state securities regulators, that ex post enforcement authority is not sufficient to police and prevent fraud and other wrongdoing in connection with private offerings.  While a reversal of the preemption effected by NSMIA does not appear to be imminent, the agitation by state securities regulators is cause for concern among hedge fund managers that offer interests privately.  This article examines the structure of Regulation D (Reg D), the safe harbor under the Securities Act of 1933 (Securities Act) under which many hedge funds offer interests; the limited anti-fraud enforcement authority retained by the states in connection with Reg D offerings, and the absence of any precedent for the invocation of that authority; recommendations for changes to private offering regulation recently espoused in an audit of the Reg D process conducted by the SEC’s Office of the Inspector General (OIG); and the possibility of greater state involvement in regulation of Reg D offerings.

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