As expected, the Securities and Exchange Commission (SEC) voted on Wednesday to end a decades-old ban on “general solicitation”, which in the past prevented general partners from freely discussing fundraising efforts and performance numbers in a public setting.
Fund managers who want to advertise in public must file a Form D with the SEC 15 days before fundraising, and an amended Form D within 30 days after fundraising concludes (or is abandoned) under the new plan.
During an open meeting discussing the reforms, the agency said it would use the additional disclosures to track what strategies fund managers use in their advertising efforts, and how private issuers ensure that only “accredited investors” are sold securities, as is required under Regulation D.
The accredited investor test has been a source of confusion for the industry. The law requires firms to take “reasonable steps” to verify that only millionaires and other wealthy investors are able to invest in private equity or hedge funds after seeing a mass advertisement. What constitutes “reasonable” however has been open to debate, but a consensus among industry sources has grown that receipt of tax returns or bank account statements from investors would be sufficient.
During the meeting, SEC commissioners signaled a “principles-based” approach for issuers to use when verifying accredited investors – one that is “particular to the facts and circumstances of each transaction”, according to SEC chair Mary Jo White.
Fund managers intending to solicit in public for their funds, or openly discussing their performance history at industry conferences or in the media, should still bite their tongue for the time being, according to legal sources.
“The rule only becomes effective 60 days after becoming published in the Federal Register,” according to one industry lawyer. Typically, publication in the registrar takes between three to 10 days after adoption.
The SEC also voted to ban felons and other “bad actors” who have violated federal securities laws from taking advantage of the reforms.