the private funds offering process and could require material changes in the preparation, distribution, review and approval of advertising and marketing materials and other documentation. There is considerable uncertainty with respect to these proposed rules because, at this time, there is no obligation that the SEC issue final rules on these matters and it is possible that some may be adopted while others are modified or dropped.
Uncertainty on future CFTC requirements. As noted above, the DSIO guidance is interim relief. If and when formal rulemaking to address Rule 506(c) offerings is instituted, it is possible that there would be additional disclosure or substantive requirements; statements by CFTC staff officials indicate that additional requirements are a distinct possibility.
Inconsistent foreign offering requirements. Also, in addition to US requirements, many US managers conduct concurrent foreign offerings. In other capital centres, US managers may have no option under local law other than to conduct a private placement; in these cases, managers will have to ascertain (well) in advance – perhaps through the advice of local counsel – whether public advertising and general solicitation for the US leg of an offering will taint or adversely affect the offshore offering.
Examination risks. The SEC has stated that OCIE examinations will in particular focus on compliance by managers utilizing general solicitation or general advertising under Rule 506(c). The conventional wisdom is that conducting a 506(c) offering may materially increase the risk of being selected for an examination and that the ensuing examination will have a deeper and more thorough than average review of marketing processes, procedures and materials.
Enforcement inquiries and actions. With this liberalization of the offering process come SEC concerns (expressed publicly) about the potential for fraud. There are existing anti-fraud rules applicable to private fund marketing materials, and those rules will continue to apply to any marketing materials used as part of a general solicitation. Marketing activity itself can also be scrutinized on anti-fraud grounds.
Next steps With the CFTC’s relief, a significant impediment to a general solicitation and general advertising regime for private fund placements has been eliminated, but challenges and questions remain. Managers that seek to take advantage of general solicitation or to engage in general advertising will need to extensively prepare and design bespoke supervisory and compliance procedures and will also, given the uncharted nature of this regime, need to be flexible in their approach. THFJ
FOOTNOTES
1. Section 201(a)(1) of the JOBS Act requires that “[n]ot later than 90 days after the date of the enactment of this Act, the Securities and Exchange Commission shall revise [Rule 506] … to provide that the prohibition against general solicitation or general advertising contained in [Rule 502(c)] … shall not apply to offers and sales of securities made pursuant to [Rule 506], provided that all purchasers of the securities are accredited investors. Such rules shall require the issuer to take reasonable steps to verify that purchasers are accredited investors using such methods as determined by the Commission.”
2. While the general solicitation developments under the JOBS Act, the SEC rulemakings, and the new CFTC relief apply to Rule 144A offerings as well as to Rule 506(c) offerings, the remainder of this article will focus only on the impact on Rule 506(c) offerings.
3. Release No. IA-3624, Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings (10 July 2013).
4. “Exemptive Relief from Provisions in Regulations 4.7(b) and 4.13(a)(3) Consistent with JOBS Act Amendments to Regulation D and Rule 144A,” CFTC Letter No. 14-116 (9 September 2014).
5. The claim of exemptive relief must: a. State the name, business address and main business telephone number of the CPO claiming the relief;
b. State the name of the pool(s) for which the claim is being filed;
c. State whether the CPO claiming relief is a 506(c) Issuer or is using one or more 144A Resellers;
d. Specify whether the CPO intends to rely on the exemptive relief pursuant to Regulation 4.7(b) or 4.13(a)(3), with respect to the listed pool(s) and: (1) if relying on Regulation 4.7(b), represent that the CPO meets the conditions of the exemption, other than that provision’s requirements that the offering be exempt pursuant to section 4(a)(2) of the Securities Act and be offered solely to QEPs, such that the CPO meets the remaining conditions and is still required to sell the participations of its pool(s) to QEPs; and (2) if relying on Regulation 4.13(a)(3), represent that the CPO meets the conditions of the exemption, other than that provision’s prohibition against marketing to the public;
e. Be signed by the CPO; and f. Be filed with DSIO via email using the email address
dsionoaction@cftc.gov and stating “JOBS Act Marketing Relief” in the subject line of such email.
6. See “General Solicitation and General Advertising to be Permitted in Private Placements Starting September 23” (13 August 2013); “The SEC’S JOBS Act Rulemaking: What It Means for Private Fund Managers” (24 July 2013); “The Long View: How Hedge Fund Advertising Has Been Impacted by the JOBS Act” (August 2012); and “The JOBS Act: Provisions Relating to Private Funds and Facilitating Access to Capital” (28 March 2012).
“Managers seeking to utilize general solicitation or general advertising under Rule 506(c) will need to be sure that they have a satisfactory verification process in place.”
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