Articles Tagged with Private Funds

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Written by:  Jay Gould

The Securities and Exchange Commission (the “SEC”) recently charged and entered into consent decrees with four India-based brokerage firms for providing brokerage services to U.S. investors without being registered as broker dealers under the U.S. securities laws.  This otherwise mildly interesting enforcement action by the SEC should serve as a cautionary tale to hedge fund managers based outside the U.S. that seek to raise capital from U.S. investors, as well as U.S. fund managers that seek to sell their fund shares in foreign countries.

Many non-U.S.-based fund managers seek to raise money from U.S. investors due to the large amounts of available capital in this country and the relative willingness of U.S. investors to consider managers from foreign jurisdictions.  However, visiting potential U.S. investors or sending fund marketing materials into the U.S. without complying with the U.S. broker dealer rules could result in a fate similar to that suffered by the four Indian brokerage firms that were sanctioned and fined by the SEC. In order to avoid an enforcement proceeding, non-U.S. fund managers should retain a properly registered U.S. brokerage firm to sell the fund’s securities, enter into a “chaperoning” arrangement with a U.S. broker or register a subsidiary as a broker-dealer in the U.S.  

Whether prudent or not, most U.S.-based fund managers rely on Rule 3a4-1, the so-called “issuers exemption,” under the Securities Exchange Act of 1934 (the “1934 Act”) in order to avoid either registering the general partner or an affiliate of the fund as a broker, or retaining an unrelated broker to sell the fund’s interests.  But when U.S. fund managers travel outside the U.S. to gauge interest or solicit potential investors, the U.S. rules are not applicable.  Each country has its own regulatory scheme, and fund managers are well advised to understand what is permitted and prohibited in each country before visiting each country at the risk of being the subject of a new episode of “Locked Up Abroad.”  Indeed, certain countries impose criminal sanctions for offering securities if the offeror is not properly authorized to do so.

The Investment Fund Law Blog boldly predicts that the SEC will one day soon re-visit the industry’s expansive interpretation of the “issuer’s exemption” and the result will not be pleasant for the private funds industry.

So what did these Indian brokerage firms do to incur the wrath of the SEC?  The activities that these firms engaged in included:

  • Buying and selling Indian securities on Indian stock exchanges on behalf of U.S. investors;
  • Managing public offerings for Indian issuers in which shares were sold to U.S. investors;
  • Soliciting U.S. investors by email, phone calls, and in-person meetings between Indian issuers and U.S. investors;
  • Engaging in commission sharing agreements with U.S. registered broker-dealers, in which the firms provided research to U.S. investors in exchange for commission income;
  • Organizing and sponsoring conferences in the U.S. bringing together representatives of Indian issuers and U.S. investors; and
  • Sending firm employees to the U.S. to meet with U.S. investors and attend corporate road shows.

Many of these activities no doubt sound hauntingly familiar to U.S.-based fund managers that travel abroad for the purpose of raising capital.  All four firms were censured and ordered to pay a combined total of more than $1.8 million in disgorgements and prejudgment interest, but no civil penalties were imposed due to the firms’ cooperation with the SEC.  The firms have all submitted settlement offers, without admitting or denying any wrongdoing.

The SEC’s press release on the matter can be found here. 

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Written by:  Jay Gould

When can private fund managers start posting performance numbers on their websites and sponsoring the Super Bowl?  Not yet, according to Senator Carl Levin (D-MI) in letters dated October 5,2012 and October 12, 2012, (the “Levin Letters”) rebuking the SEC for having missed the point of the legislation in the SEC rulemaking process.  As you recall, on August 29, 2012, the SEC proposed rules pursuant to Section 201 of the Jumpstart our Business Startups Act (“JOBS Act”) that, if adopted in final form, would allow private issuers, including private funds, to generally solicit and advertise as long as the investors are all “accredited investors.” 

Of most importance to hedge fund and private equity fund managers that have been anticipating a more relaxed and flexible approach of communicating with the public and soliciting new investors, the Levin Letters flatly accuse the SEC of failing to grasp the scope of the JOBS Act in applying it to private investment vehicles.  According to Levin, the SEC should “distinguish between issuers that engage in operational businesses and those that are merely investment vehicles.”  The October 12 letter further advises the SEC that  “[c]ongress did not contemplate removing the general solicitation ban – without retaining any limitations on forms of solicitation – for private investment vehicles.  Indeed, no argument was made during the debate of the bill that the objective was to ease the capital aggregation process for private investment vehicles.  The words “hedge fund,” “private fund,” or “investment vehicle” were not used either during the committee or floor debate in the House of Representatives. Nor did the Senate engage in any debate relating to removing these advertising and marketing restrictions completely from private investment vehicles.” 

According to the Levin staffer who is responsible for this area of the Senator’s legislative initiatives, we should no longer expect that the SEC will adopt the rules as proposed.  The SEC must propose new rules that more accurately reflect the intent of Congress and not simply abdicate regulatory authority over the use of general advertising and solicitation by private funds, the Investment Fund Law Blog was told by Levin’s office.    

This SEC mulligan may very well put back into play many of the criticisms of the JOBS Act that were expressed in the comment period after the JOBS Act was first signed into law.  As you may recall, on May 21, 2012, the Investment Company Institute (the “ICI”) submitted a comment letter to the SEC regarding Section 201 of the JOBS Act in which the ICI encouraged the SEC to, among other things, adopt advertising rules for private funds that are at least as restrictive as those that apply to registered mutual funds, raise the income and net worth standards in the definition of “accredited investor,” and prohibit or limit performance advertising by hedge funds until the SEC has studied the implications of such advertising for 60 years.  In a follow up letter to the SEC on August 17, 2012, the ICI, citing press reports and rumors, implored the SEC to not adopt “interim rules” pursuant to Section 201.  Rather, the ICI suggested, full notice and comment should be employed in this rulemaking process so that the SEC might fully observe its fundamental mandate to protect investors.  It should be noted that the SEC began accepting public comments on all aspects of the JOBS Act shortly after the legislation became law on April 5, 2012.  The law itself requires the SEC to adopt rules pursuant to Section 201 within 90 days of the signing of the legislation, a time frame that, quite obviously, was not met. 

The Levin Letters further admonished the SEC to establish “methods” for determining whether an investor meets the “accredited investor” standard.  The rule proposal provided only that an  issuer must take “reasonable steps” to determine accredited status, and provided significant flexibility for issuers to determine the appropriate level of due diligence in order to verify status.  The Levin Letters requested that the SEC go back to the drafting table and come up with a new proposal that requires “common sense” documentation and/or verification practices and procedures.  If, as Levin’s office suggests, the SEC does re-propose rules as a result of this criticism, it could result in issuers being required to follow definitive verification standards, such as obtaining an income statement, balance sheet, or bank or brokerage statements from investors. 

It is possible that the last chapter of the JOBS Act rules regarding general solicitation may not yet be written.  In the meantime, private fund managers should continue observing the current ban on general solicitation and advertising and put on hold those plans to post their performance returns on the back of Serena Williams’ tennis togs.

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Written by:  Jay Gould and Peter Chess

While you were touring the Champagne region or sipping umbrella drinks at the beach this summer, the California Department of Corporations (the “DOC”) was busy overhauling the rules applicable to investment advisers.  On August 27, 2012, the DOC adopted final rules, available here, that provide for an exemption from registration for certain private fund managers pursuant to specific conditions.  This exemption, along with the rules previously adopted by the Securities and Exchange Commission (the “SEC”), now permits certain investment advisers that provide advice only to private funds to operate without being fully registered with either the SEC or the State of California. 

Unlike the SEC rules, this exemption does not prohibit a fund manager from registering with the DOC—it simply allows the fund manager to decide whether it would like to register or rely on the exemption.  To rely upon this exemption, a California based adviser must complete and file the Form ADV (required under Rule 204-4 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”)) with the DOC that is required of an adviser that files for “exempt reporting adviser” status with the SEC.  But why would any adviser that is eligible to take advantage of the exemption decide to register? 

If a fund manager intends only to seek capital from “friends and family,” subjecting itself to the full registration requirements and the more complete compliance rules that are expected soon from the DOC could represent a significant expense to the manager.  Or, if a manager is leaving another organization and must quickly get to market, the three to four month process associated with the DOC review of an investment adviser application may be viewed as too long to wait.  But if a fund manager expects to target more institutional capital, or other investors that would have a reasonable expectation that the manager is subject to some regulatory oversight, the manager may very well decide that a California investment adviser registration is not so burdensome.  After all, a manager that seeks to rely on the exemption must still file the Form ADV, prepare a private placement memorandum, and have the fund audited, among other requirements discussed below.  The analysis that each fund manager must undertake in order to make this decision is multi-faceted and is ultimately one that is unique to each adviser and its own circumstance.

To briefly summarize the results of the DOC rulemaking, an investment adviser located in California may conduct its business without being a fully registered and regulated investment adviser under the DOC regulations so long as:

  • the adviser only advises private funds that rely on either Section 3(c)(1) or Section 3(c)(5) of the Investment Company Act of 1940, as amended, (which the DOC defines as “Retail Buyer Funds”) the investors of which are all “accredited investors”;
  • the adviser is not subject to any statutory disqualifications;
  • the adviser files certain periodic reports and notices; and
  • the adviser pays the annual registration fee of $125.  

Additionally, with respect to Retail Buyer Funds:

  • the adviser may only charge performance fees to investors that meet the Advisers Act definition of a “qualified client”;
  • the Retail Buyer Fund must be audited annually by a Public Company Accounting Oversight Board (“PCAOB”) registered accounting firm and deliver a copy of the audited financial statements to each beneficial owner; and
  • the adviser must provide “material disclosures” to fund investors that adequately and accurately describe the investment program of the fund and the relationship of the adviser to the fund (e.g., the type of disclosures that competent counsel drafts on behalf of fund managers now).

When an adviser that is eligible for the California exemption reaches $100 million in assets, it would become an exempt reporting adviser with the SEC and would need to switch its status over to the SEC.  And when it reaches $150 million it must become a fully registered investment adviser with the SEC; accordingly, investment advisers can operate without being fully registered with the SEC or the State of California so long as they have less than $150 million in assets and satisfy the conditions discussed above.

The California exemption contains a “grandfathering” provision for Retail Buyer Funds formed prior to the release of the exemption, as the additional requirements listed above are deemed satisfied if the Retail Buyer Fund: (i) distributes annual audited financial statements; (ii) pre-existing investors receive the “material disclosures” discussed above; (iii) from August 27, 2012 on, the Fund only sells interests to “accredited investors”; and (iv) the adviser receives performance-based compensation only from pre-existing investors or “qualified clients.”

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Written by:  Jay Gould and Peter Chess

Heath Abshure, President of the North American Securities Administrators Association (NASAA) and Arkansas State Securities Commissioner, sharply criticized the Securities and Exchange Commission’s (the SEC’s) new rulemaking that will lift restrictions on general solicitation and general advertising for hedge funds and other private investment vehicles in a press-teleconference on October 9, 2012.  At the heart of the criticism is the contention that hedge funds and private equity funds could be among the amended rule’s biggest users and beneficiaries. “The SEC’s proposed rule would open the door for private equity and hedge funds, typically only offered to the most sophisticated investors, to advertise to the general public without putting in place basic disclosure requirements that would allow investors to make informed decisions about the products being offered. This is the wrong way to go,” remarked Heath Slavkin Corzo, senior legal and policy advisor of the AFL-CIO’s Office of Investment during the teleconference.

Under the Jumpstart Our Business Startups Act (the JOBS Act), as discussed here and here, the SEC was directed to amend Rule 506 of Regulation D under the Securities Act of 1933, as amended, to permit general solicitation and general advertising in unregistered offerings made under Rule 506, provided that all purchasers of the securities are accredited investors.  In reaction to the SEC’s answer to the directives of the JOBS Act, Abshure called for the SEC to withdraw its proposal and draft a new rule that promotes capital formation without sacrificing investor protection.

“People don’t seem to think so, but this is a drastic change to the face of securities regulation,” Abshure said. “Rule 506 offerings already are the most frequent financial product at the heart of state enforcement investigations and actions. Lifting the advertising ban on these highly risky, illiquid offerings, without requiring appropriate safeguards, will create chaos in the market and expose investors to an even greater risk of fraud and abuse. Without adequate investor protections to safeguard the integrity of the private placement marketplace, investors should and will flee from the market, leaving small businesses without an important source of capital.”

“The Commission itself has acknowledged that lifting the ban on general solicitation in private offerings will increase the risk of fraud, potentially harming investors and issuers alike,” added Barbara Roper, Director of Investor Protection for the Consumer Federation of America and the chair of the Investor Issues task force of Americans for Financial Reform during the teleconference. “While the Commission is required by the JOBS Act to lift the solicitation ban, it also has an obligation to adopt rules that protect investors and promote market integrity and the authority to do so.  A number of reasonable, concrete proposals have been suggested that, if adopted, would significantly improve safeguards for investors in private offerings.  Its rule proposal completely ignores those suggestions.  It cannot in good conscience continue to do so.”

The full press release about the teleconference is available here. 

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Written by:  Jay Gould and Peter Chess

On October 9, 2012, the Securities and Exchange Commission (SEC) announced the launch of an initiative to conduct focused, risk-based examinations of investment advisers to private funds that recently registered with the SEC.  These “Presence Exams” are part of a two year initiative with three primary phases: engagement, examination and reporting.  During the examination phase, staff from the National Exam Program (NEP) will review one or more of five areas identified by the SEC as “high-risk” areas for the business and operations of advisers:

  • Marketing.  NEP staff will conduct evaluations of marketing materials to ascertain, for example, whether the adviser has made false or misleading statements about its business or performance record.
  • Portfolio Management.  NEP staff will review and evaluate an adviser’s portfolio decision-making practices.
  • Conflicts of Interest.  NEP staff will review the procedures and controls that advisers use to identify, mitigate and manage conflicts of interest within their firm.
  • Safety of Client Assets.  NEP staff will review advisers deemed to have “custody” of client assets for compliance with provisions of the Investment Advisers Act of 1940, as amended (the Advisers Act), and related rules designed to prevent theft or loss of client assets.
  • Valuation.  NEP staff will review advisers’ valuation policies and procedures.

Investment advisers should note that access to any advisory books and records will also need to be provided upon request during a Presence Exam.  Prior to the examination phase, NEP staff will engage in a nationwide outreach to inform newly registered investment advisers about their obligations under the Advisers Act and related rules during the engagement phase.  At the conclusion of the examination phase, the NEP will report its observations to the SEC and the public.

The NEP is administered by the Office of Compliance Inspections and Examinations within the SEC.  The letter outlining the NEP’s initiative, available here, was distributed to certain executives and principals of newly registered investment advisers and posted on the SEC’s website.  NEP staff will contact advisers separately if their firm is selected for an examination, and receipt of the letter announcing the launch of the initiative does not ensure that a Presence Exam will necessarily follow.

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Written by: Jay Gould and Peter Chess

Effective December 3, 2012, hedge funds and other private funds that rely on Section 3(c)(1) of the Investment Company Act (“3(c)(1) Funds”) and which sell their interests through third party marketers, must ensure that their private placement memoranda (“PPM”) are filed with FINRA, the Financial Industry Regulatory Authority.  The Securities and Exchange Commission recently approved new FINRA Rule 5123, Private Placements of Securities, which is part of an ongoing approach by FINRA to enhance oversight and investor protection in private placements.  Under Rule 5123, each firm that sells a security in a private placement, subject to certain exemptions, must file a copy of the offering document with FINRA within 15 calendar days of the date of the first sale.  If a firm sells a private placement without using any offering documents, then the firm must indicate that it did not use an offering document.  The rule also requires firms to file any materially amended versions of the documents originally filed.  Rule 5123 exempts some private placements sold solely to qualified purchasers, institutional purchasers and other sophisticated investors.

For hedge funds and other  private funds that have hired a third party marketer, the fund manager must make sure that the agreement with the marketer, which is required to be a registered broker dealer, obligates the marketer to file the PPM with FINRA and amend the filing if the PPM is materially revised.  The marketing agreement, or “placement agency agreement” as it is sometimes called, should indemnify the fund manager for the failure of the marketer to make these filings.      

Rule 5123 will become effective December 3, 2012, and the full text of the FINRA regulatory notice regarding Rule 5123 is available here.

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Written by:  Jay B. Gould 

The recently enacted JOBS Act[1] requires the Securities and Exchange Commission (“SEC”) to promulgate rules that would effectively repeal the ban on general solicitation and general advertising under Rule 506 of Regulation D by private issuers, including private funds.  Pursuant to the JOBS Act, the SEC has 90 days from the date of enactment (July 4, 2012) to adopt rules implementing this provision.   In advance of publishing proposed rules, the SEC has started accepting comment letters on all aspects of the JOBS Act, including the repeal of the ban on general advertising.  

Unsurprisingly, the Investment Company Institute (“ICI”), the lobby organization for mutual funds and other registered funds, has submitted a comment letter requesting that the SEC take a slow and deliberate approach to permitting private funds to generally advertise and solicit investors.  How slow and deliberate?  The ICI suggests that performance advertising by hedge funds should be prohibited altogether until the SEC has had the opportunity to study hedge fund advertising, “gain experience with private fund advertisements,” and craft a rule similar to Rule 482 to which mutual fund advertising is subject.  The ICI tells us that Rule 482 is the culmination of 60 years of experience and that the SEC “should follow the same path here,” referring to advertising by hedge funds and other private funds.  60 years?  Really? 

The ICI has a long and storied history of blocking financial innovation and expansion of investment opportunities for the investing public.  You may recall that the ICI sued the Office of the Comptroller of the Currency in an attempt to block banks from acting as investment advisers to mutual funds, a case that they ultimately lost at the Supreme Court.  It is hardly surprising then that the mutual fund lobby would line up against competition by the private funds industry, even at a time when the registered funds and private funds businesses are converging at a rapid pace in terms of product offerings, investment strategies, and regulatory oversight and reporting.  Last August the SEC issued a “concept release” that requested comment on whether registered funds should be able to use the same sorts of investment techniques and to the same extent as private funds, such as hedging, shorting, and use of leverage.  Further action in this regard, coupled with the new reporting obligations of private funds as a result of Dodd Frank (e.g., Form PF) will serve to further blur the lines between registered and unregistered funds. 

In addition to “urging” a ban on performance advertising and promoting the idea of other “content restrictions” by hedge funds and other private funds, the ICI suggests that private fund advertising should be subject to FINRA review to the same extent as mutual fund advertising, and that private fund advertising be clearly distinguished from mutual fund advertising.  The ICI further suggests that the SEC should raise the net worth threshold for “accredited investors” in order to insure that private fund investors have the requisite sophistication to withstand the riskiness associated with private funds (See legalaffairs March–April 2004 issue).  The ICI endorses a $600,000 annual income and $3 million net worth standard, a measure that would further reduce the potential private fund investor pool and drive more investors to the registered world. 

More balanced voices have also started to comment on this issue, so it remains to be seen how much weight the SEC will ultimately attribute to the ICI comment letter.  You may view all of the comment letters regarding the repeal of the ban on general solicitations here.    And you are encouraged to submit your own.

[1]   The Jumpstart Our Business Startups Act.

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Written by:  Jay B. Gould, Michael Wu and Peter Chess

Note: Pillsbury and KPMG, along with the California Hedge Fund Association, will be sponsoring a “Managers Only” event on the JOBS Act and the new world of “general solicitation” for Funds on June 14.

The Jumpstart Our Business Startups Act (the “JOBS Act” or the “Act”), signed into law by President Obama on April 5, 2012, seeks to encourage economic growth through the easing of certain restrictions on capital formation and by improving access to capital.  The JOBS Act contains a number of provisions that will directly impact private funds and their general partners, managers and sponsors.  Below is a summary of the Act’s provisions that directly affect private funds, including ongoing requirements for funds that at this time do not appear to be affected by the Act.

Section 4 of the Securities Act.  The JOBS Act amends Section 4 of the Securities Act of 1933, as amended (“Securities Act”), so that offers and sales exempt under Rule 506 of Regulation D will not be deemed public offerings as a result of general advertising or general solicitation.  Private funds relying on the exception in Section 3(c)(1) (“3(c)(1) Fund”) of the Investment Company Act of 1940, as amended (“Investment Company Act”), will be able to continue to avail themselves of this exception so long as all of their investors are accredited investors, as defined in Rule 501 of Regulation D (“Accredited Investors”).  We expect that private funds relying on the exception in 3(c)(7) (“3(c)(7) Fund”) of the Investment Company Act will obtain the greatest benefit from the JOBS Act, as these funds, which accept only “qualified purchasers,” as defined in Section 2(a)(51) of the Investment Company Act, may now have up to 2000 investors (as discussed below) before they would be required to register as a public reporting company under the Securities Exchange Act of 1934, as amended (“Exchange Act”).  3(c)(1) Funds will continue to be limited to 99 investors, although a fund manager may organize and offer both a 3(c)(1) Fund and a 3(c)(7) Fund with the same investment objective and strategies without the two funds being subject to “integration” under the Securities Act.

General Solicitation and General Advertising.  The JOBS Act requires the Securities and Exchange Commission (“SEC”) to amend Regulation D under the Securities Act to eliminate the prohibition on general solicitation and general advertising for offerings under Rule 506, provided that all purchasers are Accredited Investors.  The Act mandates that the SEC implement rule amendments ninety days after the enactment of the Act, or by July 4, 2012.

It is unlikely that the SEC will be able to meet this deadline given the requirement to provide public notice and comment prior to adopting any final rules; accordingly, these rule amendments are expected to be adopted by the fall with very little transition period.  Although the Act leaves little in the way of discretion to the SEC in the rulemaking process there are two areas in which the SEC may seek to provide substantive guidance.  The SEC is required to amend Regulation D such that any issuers relying on Rule 506 must take reasonable steps to verify that purchasers are Accredited Investors.  Some observers believe that the SEC may require issuers that avail themselves of the general advertising provisions to obtain sufficient financial information from prospective purchasers so that the “accredited status” of such investors can be more precisely determined.  This could take the form of requiring all such issuers to obtain an income statement or verified financial statement from investors.  The other area in which the SEC may attempt to provide additional oversight is with respect to the offering of private fund interests through broker-dealers. 

Brokers and Dealers.  The JOBS Act provides that with regard to securities offered and sold under Rule 506 and subject to certain conditions, registration as a broker or dealer under Section 15(a)(1) of the Exchange Act will not be required for certain persons solely because of the performance of specific functions.[1]  This exemption from registration is available only if such persons: (i) receive no compensation in connection with the purchase and sale of the securities; (ii) do not have possession of customer funds or securities in connection with the purchase and sale of securities; and (iii) are not subject to statutory disqualification (sometimes referred to as “bad boy” provisions).  Although it is uncertain at this time, the SEC may take this opportunity to require private funds that avail themselves of the ability to advertise generally to conduct all offers and sales of their fund interests through a registered broker-dealer.  The SEC realizes that as a result of the fast moving and innovative private funds industry, the regulator lost control of Regulation D as well as the “issuer’s exemption” in Rule 3a4-1 under the Exchange Act, the exemption that fund managers rely upon to offer their securities directly to purchasers.  It is not clear that Rule 3a4-1 was ever intended for this purpose, and the SEC may take this opportunity to clarify how offers and sales are conducted generally by private fund managers.

Record Holders.  The JOBS Act increases from 500 to 2,000 the number of record holders of equity securities an issuer may have before the issuer is required to register under Section 12(g) of the Exchange Act, so long as the number of non-Accredited Investors does not exceed 499.  3(c)(1) Funds will be unable to have any non-Accredited Investors if they want to employ general advertising even though, under Regulation D rules that predate the JOBS Act, sales could be made to up to 35 non-Accredited Investors (with no general solicitation).  There is an outstanding question as to whether the SEC will “grandfather” in existing non-Accredited Investors in 3(c)(1) Funds, or if perhaps some form of Rule 506 will survive whereby sales to non-Accredited Investors will be permissible if no general solicitation takes place.      

Continuing Restrictions and Obligations.  Although the JOBS Act will potentially ease the burdens presented by capital raising for private funds, the following should be noted: 

  • Private fund offerings pursuant to Rule 506 will continue to be subject to the anti-fraud provisions of federal and state securities laws and the restrictions on advertising found in the Investment Advisers Act of 1940, as amended (“Advisers Act”).  For example, Rule 206(4)-1 of the Advisers Act (the advertising rule) and its general prohibition against advertisements that are false and misleading still necessitates compliance.  Managers of private funds that advertise generally must understand the advertising rules against “testimonials” in their public marketing materials.  To be “liked” on Facebook or similarly endorsed on other social networking sites would likely be considered to be an illegal testimonial by the SEC which could result in and administrative action accompanied by fines and penalties.   
  • Private funds should continue to rely on the guidance provided in the Clover Capital Management, Inc. SEC no-action letter and the subsequent line of letters when contemplating activities such as performance presentations by following practices so as not to present misleading performance results.  Further, private funds should continue to comply with Rule 206(4)-8 of the Advisers Act and its prohibition on making untrue statements or omitting material facts or otherwise engaging in fraudulent, deceptive or manipulative conduct regarding interactions with investors in pooled investment vehicles.  To the extent a private fund manager avails itself of the ability to advertise past performance, special care will need to be taken to ensure that all documents are consistent and performance information is presented in a manner that is complete and accurate.
  • Private funds should consider and continue to comply with advertising and disclosure rules as applicable to registered advisers and members of the Financial Industry Regulatory Authority (“FINRA”).  FINRA rules also apply to broker-dealers acting as placement agents or intermediaries in Rule 506 transactions.  Private funds making use of exemptions from registration under the Advisers Act and/or the Investment Company Act must continue to comply with the restrictions set forth in such exemptions.  For example, although the JOBS Act provides that offers and sales exempt from registration under Rule 506 will not be deemed public offerings by virtue of the use of general advertising and general solicitation, 3(c)(1) Funds must not exceed the one hundred beneficial owner limit.

Foreign Private Advisers.  A “foreign private adviser” that qualifies for the exemption from registration under the Advisers Act is an adviser that has no place of business in the U.S., fewer than 15 U.S. clients, less than $25 million attributable to U.S. clients and does not hold itself out generally to the public in the U.S. as an investment adviser.  The SEC in the past has construed certain types of advertising, including information available on websites, as an example of an adviser holding itself out to the public in the U.S. as an investment adviser.  Given the increased freedom for advertising under the JOBS Act, the SEC may look more closely at advisers taking advantage of the foreign private adviser exemption and whether any activities that could be construed as advertising may violate the terms of the exemption.

Regulation S.  Regulation S under the Securities Act, the safe harbor from registration for offshore sales of securities to non-U.S. persons, does not allow for “directed selling efforts” in the U.S.  It remains to be seen if general solicitation or advertising in connection with the amendments to Regulation D will be seen as “directed selling efforts” under Regulation S and whether the SEC will clarify how this will affect the potential use of Regulation S in connection with offerings under Rule 506.

 State Blue Sky Laws.  Many private funds have relied on self-executing exemptions in certain states in order to avoid filings and/or fees required under applicable state statutes or rules.  These self-executing exemptions are commonly conditioned on a prohibition on general solicitation or general advertising.  Private funds employing general solicitation and/or advertising in reliance on the amended Rule 506 should note the mechanics of such Blue Sky laws of the states where securities are being offered and sold and comply accordingly.

[1]   This applies to persons that: (a) maintain a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through any other means; (b) co-invest in such securities; or (c) provide ancillary services with respect to such securities.

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We are very pleased to announce that Henry Liu is joining our New York office today as a Finance Partner and as leader of the Financial Institutions & Infrastructure Teams for Greater China and Asia.

Henry has enormous reach within business, banking and government in China and is the former general counsel and director general at the China Securities Regulatory Commission.  Henry will provide valuable assistance to the Pillsbury Investment Funds group on the structuring of investment funds in China as well as the movement of capital from China into investment funds outside of China.

“Henry brings a unique combination of experience as a former high-level Chinese government official and as an extremely successful and well-connected attorney for our China practice,” said Pillsbury partner Jim Rishwain. “Henry is an incredibly rare find, as he can navigate the United States and Chinese business and legal landscapes with ease. Likewise, he has enormous reach within business, banking and government circles in Greater China and has earned the very highest reputation among his colleagues and peers. As a result, he will greatly enhance Pillsbury’s stature and presence in Asia – long a key market for our firm and our clients.”

Henry has also served international, Chinese and Asia Pacific clients ranging from Fortune 500 global firms to emerging companies and has been involved in most major types of cross-border corporate and financing transactions and regulatory matters involving Asia and China, across most major industry sectors, in mergers and acquisitions, capital markets, banking and financing, corporate, private equity and investment funds, foreign direct investments, real estate, technology transfers and international trade. He has over his career been exposed to most industries and sectors, including financial services, manufacturing, real estate, transportation, energy, telecom and media, and sports and entertainment.  Henry was previously managing director of investment banking with Donaldson, Lufkin & Jenrette/Credit Suisse First Boston in Hong Kong as well as the chair of a large international law firm’s China practice.

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The Form PF (PF is short for “private funds”) is a new Securities and Exchange Commission reporting form for investment advisers to private funds that have at least $150 million in private fund assets under management.  Comprising 42 pages and divided into 4 sections with corresponding subsections, Form PF may appear daunting at first.  The task of completing and filing the Form also entails categorizations, specific and nuanced reporting requirements and Form-specific calculations, not to mention the fact that improperly completed Forms may be delayed or even rejected.  However, with the proper tools and plan of attack, an adviser will be able to fulfill its reporting requirements and improve its data platform for a host of other reporting and filing requirements.  Form PF necessitates working with large amounts of data.  So, early planning, coordination and organization are essential for success.  In a guest article, Jay Gould, a Partner at Pillsbury Winthrop Shaw Pittman LLP and leader of Pillsbury’s Investment Funds & Investment Management practice team, and Kelli Brown, Director of Private Funds at Data Agent, LLC, describe ten steps that a hedge fund manager should take for successful Form PF completion and filing.  The article can be accessed on the Hedge Fund Law Report’s website (www.hflawreport.com – subscription required). 

Please contact Jay Gould if you have any further questions or seek further information about Form PF.