- SEC OK’s measure to allow buyout shops to publicize funds
- Corporate lawyer says private equity clients plan to take advantage of new rule
- SEC charts future action to monitor impact of solicitations
The SEC commissioners voted four to one on July 10 to lift the prohibition on general solicitation and advertising of offerings governed by Reg D, provided sponsors take care to ensure investors are accredited. The rule is expected to take effect 60 days after publication in the Federal Register, an SEC spokesman said.
“The new rule will make life easier,” said Ted Patton of mid-market private equity firm Hastings Equity Partners. “It’s been difficult to figure out what we can and can’t say so as a result, we wouldn’t say anything.”
Now the firm hopes to be able to provide more information to prospective investors through its website and other measures, said Patton, managing director of the nine-year-old firm that manages $100 million.
“This should help spur private placement markets,” said Daniel McAvoy, counsel at Nixon Peabody’s Business group, which works with private equity firms. “A number of our fund clients have been waiting for this to pass so they could publish more information on their funds and better differentiate themselves.”
One potential hurdle laid out by the SEC will be to require private equity firms and other issuers to “take reasonable steps to verify” that all purchasers of offered securities are accredited—maintaining a net worth of at least $1 million excluding their primary residence.
“The rule would specify both a principles-based approach to satisfy the verification requirement, and, as urged by a number of commenters, provide a non-exclusive list of methods that issuers may use to satisfy the verification requirement,” SEC Chairwoman Mary Jo White said in her opening statement on the rule change.
Nixon Peabody’s McAvoy said the SEC is requiring a higher standard for private equity firms to check out the credentials of their investors.
“There will be a slightly increased burden but once the verification process develops a bit, there will be some generally accepted methods,” McAvoy said. “There may be companies to perform verification services.”
Still the measure continues to draw objections from consumer advocates worried about fraud. “Without additional protections, general solicitation makes fraud easier and enforcement more difficult,” said Luis Aguilar, the commissioner who voted against the measure.
White said two other measures passed by the SEC would help protect investors. The commission OK’d a rule required under the Dodd-Frank Act to disqualify so-called bad actors—felons and other individuals—from participating in Rule 506 of Regulation D offerings.
The SEC also plans to consider a new rule to help regulators monitor how general solicitation impacts the private placement market. “The additional proposed rules…raise questions and concerns,” one private equity industry source said. “It is important that these new proposals do not add additional burdens on firms.”
ThePrivate Equity Growth Capital Council has yet to review the final language on the SEC’s rule changes and has no formal statement yet, a spokesperson for the trade group said.
The SEC acted on direction from Congress, which called for an ad ban lift in the Jumpstart Our Business Startups Act (JOBS Act), which passed in April, 2012.
“It’s a sea change in what hedge funds and private equity funds can do in terms of ads and solicitation,” said Adam Gale, co-chair of the Investment Funds Group at Mintz Levin. “It remains to be seen how many funds will actually take advantage of it in terms of ads on TV or print media. But I do think almost every fund will find it useful in some way even if it’s just making their website more accessible or being able to speak more freely at conference or responding to media questions.”
In a wrinkle for hedge funds that trade commodities, managers may not be allowed to engage in general advertising if they rely on exemptions from registration under Commodity Futures Trading Commission rules. Another complication could come from some state and federal investment adviser laws, Gale said. However Connecticut, New York and California—three states that house many private equity firms—don’t have rules that would supersede the SEC’s new rule allowing advertising, he said.
Overall, the measure drew more than 200 comments on the SEC and plenty of political rhetoric. In April, Republicans in the U.S. House of Representatives complained the SEC missed Congressionally mandated deadlines to finish up the new rules, aimed at helping small businesses raise capital and create jobs.