US EAST COAST 2012 - HFMWeek

US EAS T COAS T 2012
JOBS ACT: HOW CAN PRIVATE
FUND MANAGERS RAISE
CAPITAL
DANIEL G. VIOLA, LANCE FRIEDLER AND RON S. GEFFNER OF SADIS AND GOLDBERG LLP GIVE AN OVERVIEW OF HOW THE JOBS ACT WILL IMPACT
PRIVATE FUNDS AND EXPLAIN THE OPPORTUNITIES AVAILABLE TO MANAGERS WITH THE LIFTING OF THE BAN ON HEDGE FUND ADVERTISING
Daniel G. Viola
is a partner and head of
the Regulatory Defense and
Compliance Group. Viola
structures and organises
broker-dealer and investment
advisers and regularly
counsels investment
professionals in connection
with regulatory matters. Viola
previously served as a senior
compliance examiner for
the SEC.
Lance Friedler
is a partner in the Corporate
and Financial Services
Groups. Friedler counsels
clients on structuring and
forming US and non-US
private investment funds,
including the investment
manager and general
partner entities to such
funds.
The Jumpstart Our Business Startups Act
(JOBS Act) may assist private fund managers
with their efforts to raise capital. Most
notably, the JOBS Act eliminates the prohibition
on private fund managers from
publicly advertising and generally soliciting
investors for private funds (such as hedge funds, private
equity funds and venture capital funds). For example,
prior to the JOBS Act, advertising or solicitations through
television, newspapers, radio and publicly available websites
were all precluded. In exchange for the ability to advertise
and generally solicit, private fund managers may
only accept accredited investors into their private funds.
In the majority of circumstances, this is not an issue because
almost all investors in private funds are accredited
investors. In the event that a private
fund accepts non-accredited
investors, the private fund must
provide financial and other disclosures
materially greater than the
disclosure customarily provided in
private funds’ offering documents.
PRIVATE FUND MANAGERS,
PRIOR TO THE JOBS ACT,
WERE ALLOWED TO SELL
THEIR INTERESTS IN THEIR
PRIVATE FUNDS TO AN
UNRESTRICTED NUMBER
OF ACCREDITED INVESTORS
”
RULE 506 AND THE JOBS ACT
Private fund managers, prior to
the JOBS Act, were allowed to
sell their interests in their private
funds to an unrestricted number
of accredited investors, along with
up to 35 non-accredited investors.
However, under the Securities
Act of 1933 (Act), private fund
managers were not permitted to
engage in general solicitation or
advertising on behalf of a private fund. The definition
of an “accredited investor” under the Act is defined as
(1) an individual with income in excess of $200,000 in
each of the two most recent years or joint income with
a spouse in excess of $300,000 in each of those years, or
(2) at least $1m in net worth, excluding the value of a
principal residence.
The prohibition on general solicitation and advertising
prevented private fund managers from marketing to, or soliciting,
investors they did not already know (for example,
a private fund manager needed to have a “substantive preexisting
relationship” with the investor prior to such marketing
or solicitation). A “substantive preexisting relationship”
was generally defined as a relationship whereby the
private fund manager understood the investor’s financial
circumstances and level of sophistication in financial matters
prior to the marketing or solicitation. Merely knowing
that an investor was wealthy or otherwise qualified as
an accredited investor (for example, by reviewing a list of
Fortune 500 CEOs) did not suffice, in the absence of a further
relationship with such investor. The door appears to
be open for private fund managers to use general solicitation
and advertising in marketing private funds with the
passage of the JOBS Act, as long as such private funds only
accept accredited investors.
IMPACT OF THE JOBS ACT ON
PRIVATE FUNDS
With the ban on advertising eliminated,
the degree of impact will
vary based on a private fund manager’s
size. Managers of smaller
funds have been operating their
businesses at a competitive disadvantage
against managers of
larger funds with mature distribution
channels or investor relations
teams. Managers of private funds
of all sizes will be more vocal with
media than in the past. Examples
could include smaller managers
utilising social media and websites,
while larger managers might take
advantage of media opportunities
by giving interviews.
While the JOBS Act will lift restrictions on general advertising
and solicitation, the US Securities and Exchange
Commission (SEC) will likely put restrictions on how a
private fund manager may market its private funds. For
example, many in the industry believe that the SEC will
broaden the rules and regulations that apply to marketing
materials of private funds in a manner that is similar to the
restrictions currently applicable to registered investment
companies (for example, mutual funds). For instance, this
may include a pre-filing obligation of marketing materials
with the SEC or a self-regulatory agency. Further, various
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