- Fund managers await final rules from SEC
- ’Reasonable steps to verify’ investors at issue
- KKR, for one, seeks individual investors
But more permissive solicitation regulations are likely to make a difference for smaller and newer fund sponsors, who might find advertising useful in establishing a nascent brand, as well as for diversified fund giants, whose array of products may include offerings better suited for retail investors.
At this point, fund managers and their advisers are still waiting for the Securities and Exchange Commission to finalize changes to Regulation D under the Jumpstart Our Business Startups Act. The SEC proposed rules in August, leaving open the possibility that its final rules could change based on the results of a comment period, which ends in early October.
As a result, sponsors are simply sitting out the comment period, because of the regulatory uncertainty during the interim. “It has the potential to shift so greatly, nobody know what the rules are going to be next month,” said one real estate-oriented fund sponsor, who asked (as did others contacted for this report) not to be identified because of the sensitivity of the issue.
The lifting of the ban on general solicitation by buyout firms is technically fairly modest, providing managers of unregistered securities with a “safe harbor” to advertise and promote their funds to potential investors provided they take “reasonable steps to verify” that they actually accept commitments only from accredited investors.
Some market watchers suspect that the definition of “reasonable steps” could prompt fund attorneys to keep a tight rein on client communications. Under existing rules, fund executives are supposed to refrain from marketing outside a fairly tightly defined circle, and some attorneys have advised their clients not to speak at industry conferences, not to publicize their deals and exits (separate from not publicising fundraising), not to speak to the press generally, and even to take down their Web sites during fundraising, according to one funds -of-funds manager who speaks with many sponsors.
In some cases, those “reasonable steps” can be relatively simple. As attorneys from Kirkland & Ellis noted in a letter to clients, “A registered broker-dealer or large 501(c)(3) organisation required to make public filings would require less verification than an individual investor.” Regardless of the systems that a fund manager uses, the firm must keep records to verify that all purchasers were accredited investors.
“It’s a very good thing the SEC does not tell firms how to do this,” said the compliance chief at one multi-strategy firm. And while the new rules nominally apply to all investors, as a practical matter, the focus will be on individuals, this executive said. “The reality is, this is only going to affect natural persons.”
Established buyout shops may see little reason to shift fundraising strategies. “We already know all the prospective investors out there,” said one established fund manager, who focuses on the lower mid-market. Conventional institutional investors can make commitments of $20 million or more to a fund, compared to the few hundred thousand that a wealthy individual could perhaps commit, this executive said. “Any kind of broad appeal to the public would not suit us well.”
The new fundraising exemption might be of more interest to startup hedge funds or other special-situation investors, suggested the compliance manager at the multi-strategy firm. But the quest for fresh money also extends to the largest firms. During its most recent earnings call, Kohlberg Kravis Roberts & Co. declared its interest in the high-net-worth investor group.
“Historically KKR had not spent time talking to individual investors,” Scott Nut tall, KKR’s global head of capital and asset management, told analysts on the call. “About 18 months ago we started a high net worth and family office platform, and started the process of actually talking to individual investors directly for the first time, and that has proven to be quite successful so far.” He did not provide financial details.
But most traditional mid-market firms will probably move cautiously to assess their opportunities under the new rules. “Everybody is looking to broaden their investor base,” said the fund-of-funds manager. “I think they’d rather do it within the private equity investor community.”