Blame the SEC, not GPs

It’s been about a year now since the US Securities and Exchange Commission (SEC) voted to lift the 80-year-old ban on general solicitation. Since then, two schools of thought have developed about how much impact this move is likely to have.

Some argue that the answer is ‘not much’, given that asset classes like private equity and real estate are essentially relationship-driven businesses. Others believe it will be a game-changer, because it means that managers will be able to reach a much wider audience when pitching their funds – something that’s particularly crucial at a time when some funds are taking months or even years to get to a first close.

So far, the results have been more in keeping with that first line of thinking. But recently, advocates of general solicitation have had more reason to be positive: as GPs have started to experiment with new ways to reach retail investors, a couple of intrepid firms – ff Venture and 500 Startups – have put themselves forward as mass-marketing pioneers. Anecdotal evidence (and informal polls) suggest that more firms are slowly starting to consider following their lead as a way to broaden their LP base.

But in pfm’s view, this debate will never be truly settled until regulators set clearer ground rules on how general solicitation can actually be used.

Right now the SEC is considering a number of proposals that GPs say would, if adopted, make any general solicitation strategy too much of a compliance risk. One proposal is a stringent one-year ban for any issuer relying on Regulation D for non-compliance. Another is a requirement for issuers to file forms 15 days before publicly discussing raising money (something that may lead GPs to make “defensive filings”, so that they don’t get into trouble because of an on-stage slip-up). Scott Gluck of the law firm Venable, who has spoken with SEC officials on the matter, says that the commission is divided on whether to implement the proposals – and that we shouldn’t expect a definitive answer any time soon.

It’s also unclear whether GPs who brave the public airwaves can demonstrate that “reasonable steps” have been taken to show that only “accredited investors” actually make their way into a fund, as the rule requires. The SEC has suggested four general ways to do this, but none seem all that practical or effective in practical terms. To ease that concern, the Securities Industry and Financial Markets Association released further guidance a few weeks ago, saying that GPs can rely on written confirmation from an investor certifying their accredited investor status, as long as that particular LP has held an account with them for at least six months. But that seems odd; after all, the whole point of general solicitation is supposed to be to help GPs reach a new audience, i.e. LPs with whom they don’t have a prior relationship. So more and better guidance is needed – ideally from the SEC itself.

There will always be pros and cons to general solicitation. But it would be a shame if muddled rulemaking turned out to be the main reason why GPs choose not to make use of it. Lifting the ban could, potentially, have a number of benefits – chief among them the opportunity for GPs to use the internet and other public channels to reach investors, and the chance for private equity people of all stripes to speak publicly about the industry without worrying about regulatory sanctions (which over time should help to mitigate the industry’s reputation for opacity). But some concerted SEC action is required in order to give this thing a real shot.