- Relaxation of ban on general solicitation
- ’Reasonable steps’ needed to filter accredited investors
- Established practices may be slow to change
Under the proposed rules, authorized under the Jumpstart Our Business Startups Act, fund sponsors would no longer be prohibited from promoting their fundraising efforts to the general public, although still only accredited investors—those with a net worth of $1 million, excluding the value of the primary residence, or $200,000 in annual income—would be eligible to invest in such funds.
As approved 4-1 by the commission, the new marketing rules would allow companies to advertise or otherwise solicit investors so long as they take “reasonable steps” to verify that the potential purchasers are accredited investors. The rules proposed Aug. 29 will be open for public comment for 30 days, and no doubt much of the attention will focus on the definition of the phrase “reasonable steps.”
SEC Chairwoman Mary Schapiro voted in favor of the rule but expressed concern that the rule’s rollback may have the potential to harm investors. “I recognize that there are very real concerns about the potential impact of lifting the ban on general solicitation,” Schapiro said in prepared remarks, according to sister news service Reuters. “While I’m prepared to bring forward today’s narrow proposal, I look forward to the continued examination of this critically important market.”
Even after the rules become effective, observers expect little to change in the near term, in part because the practice of keeping quiet about fundraising of exempt securities under Regulation D—a provision of the Securities Act of 1933—could be a difficult habit to break, and in part because sponsors’ fundraising prospects such as pensions and endowments remain the same, even though the law changes.
“Talking to the Wall Street Journal, with an audience of millions, doesn’t get them where they want to go anyway,” said placement agent Kelly K. DePonte, managing director at placement agency Probitas Partners of San Francisco. “What they want to do is to catch CalPERS’s attention, not Joe Blow’s attention.”
A private equity fund manager seeking 35 to 40 LPs in a fund will find it easier to raise money $5 million or $10 million at a crack, the kind of commitments that institutional investors can make, rather than $250,000 or $500,000 that might be feasible for wealthy individuals, DePonte said. “It’s really a targeted effort; it’s not meant to be a mass effort.”
What’s more, even if the JOBS Act relieves some limitations on who sponsors can market their funds to, other provisions of securities law will impose increasingly stringent limits on what those sponsors can say about their funds. That’s because most sponsors—those with more than $150 million under management—now are required to sign up with the SEC as registered investment advisers, as a result of the 2010 Dodd-Frank financial reform law.
Because RIAs are held to higher standards in terms of the representations they make about themselves and their investment vehicles, they will be required to be much more careful about the promises they make to investors, DePonte said. “In the past, lawyers tended not to review pitchbooks in detail. Now every version of a pitchbook that comes out has to be reviewed by counsel to be sure it complies with the registered investment adviser regulations.”
In the longer term, however, a more open fund marketing environment could provide new opportunities for sponsors to promote themselves generally. Historically, private equity funds have operated under the radar of investor awareness, and in the past fund managers seemed to prefer it that way. But with a growing number of firms now offering shares to the general public through stock markets, and with a former buyout executive now the Republican nominee for president, funds are likely to find themselves permanently with a higher profile.
That kind of profile could improve awareness of a firm, not only among investors, where fund managers compete for commitments, but also among business owners, where they compete for deals, argued Bill Haynes, the president of BackBay Communications, a Boston-based marketing and public relations firm focused on the financial services industry.
“There is still a lot of opportunity for private equity firms and hedge funds to differentiate themselves in the marketplace,” Haynes said. Whether a firm sees a team spin off to start a new firm, expands into new geography or raises a larger fund, “it’s all about brand differentiation.”
And in an increasingly crowded private equity marketplace, firms are likely to find advantages in defining their professional personas that outweigh any traditional reticence about self promotion, Haynes argued. “It is going to be driven more by the changing competitive environment rather than changing Reg D.”
(Alexandra Alper, a correspondent for Reuters in Washington, D.C., and Luisa Beltran, reporter for sister Web site peHUB, contributed to this report.)