The SEC moved a step closer Wednesday to allowing private equity firms to broadly market their funds, approving a proposal to change the long-standing rules on general solicitation. But GPs should hold off on plastering their PPMs on billboards for now as they must wait until the 30 day public consultation period is over and the rule receives final approval before mass marketing can begin.
The SEC was required by Congress to amend this rule to implement Section 201(a) of the Jumpstart Our Business Startups Act (JOBS) which permits GPs to publicly advertise and market their funds – provided that all investors are accredited investors.
One issue the SEC worked on over the past few months was the definition of “accredited investor” that firms could solicit their funds. Qualified accredited investor individuals or joint net worth with a spouse must exceed $1 million at the time of the purchase, excluding the value of the investor’s house. Alternatively, anyone with income exceeding $200,000 or joint income with a spouse exceeding $300,000 can be considered accredited.
Firms must consider certain factors when determining whether an investor is accredited, including the type of investor, the nature of the offering, the manner in which the investor was solicited and the terms of the offering – such as minimum investment amount.
The proposal also preserves an exemption for firms who don’t conduct general solicitation and would not be subject to verifying their investors. It amends Form D, which firms must file with the SEC when selling securities under Regulation D, adding a tick-box if they are making use of the rule to extensively solicit their funds.
Until earlier this month the SEC was planning on unveiling an interim rule without a consultation period, which would have immediately rescinded the ban on marketing, but chairman Mary Schapiro backtracked after receiving criticism from various stakeholders.
In one letter from the Americans for Financial Reform, the group said it feared “the very real risk of an upsurge in abusive private equity and hedge fund advertising and marketing practices based on misleading performance claims”.
Not everyone was pleased with this however. At the SEC’s open meeting yesterday commissioner Daniel Gallagher said: “I am not happy to be sitting here today, almost two months after the JOBS Act deadline for a final rule, voting on a proposal. For months, the commission had been told that the Staff was recommending that we vote on an interim final rule.”