CFTC removes barrier to general solicitation

The US Commodity Futures Trading Commission (CFTC) issued a list of exemptions that make it easier for GPs to hit the public airwaves while marketing their funds.

Last year the US Securities and Exchange Commission lifted the decades old ban on private fund managers using general solicitation as part of the Jumpstart Our Business Startups (JOBS) Act. However the SEC rules were at odds with GPs who relied on a commodity pool operator (CPO) registration exemption with the CFTC.

CFTC Regulation 4.13(a)(3) requires that interests must be “offered and sold without marketing to the public in the United States” and CFTC Regulation 4.7(b) requires the CPO to offer or sell interests in a pool solely to qualified eligible persons. But, the CFTC’s exemption now permits CPOs relying on these regulations to engage in general advertising and general solicitation as long as the fund only accepts commitments from accredited investors.

Guidance from the SEC on how to take “reasonable steps” in ensuring that investors are accredited is still pending which also dampened the popularity of general solicitation among private fund managers.

However, the SEC did recently state that GPs can rely on an investor’s Internal Revenue Service (IRS) tax forms in “the two most recent years” prior to the commitment to determine that that their net worth confirms their accredited investor status while reviewing documentation of the LP’s assets and liabilities.

The SEC also said GPs can rely on foreign tax forms from non-US investors (that can’t provide IRS forms to report their income) so long as the foreign tax authority imposes penalties for falsely-reported information much in the same way that the US does. Likewise, GPs can use nationwide consumer reporting agencies from outside the US, within reason, to conclude a LP is an accredited investor.