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Disclosure sans solicitation

An unusual press release portends change from the SEC.

Fortress Investment Group is among the most sophisticated alternative investment managers on the planet, and has the best legal advice money can buy. So what are they doing by telling the world how much money they want in mid-fundraise?

In a May 7 press release, the publicly traded manager of private equity, real estate, hedge and other private investment funds, noted that it had raised approximately $2.84 billion for its newly launched private equity fund, and that the fund is ?ultimately expected to have approximately $5 billion of capital commitments.?

It is unheard of for a major private equity firm to announce fundraising figures prior to a final close. Then again, until recently it was unheard of for a major US private equity firm to be a publicly traded entity.

The Fortress announcement highlights the collision of Regulation D of the Securities Act of 1933, which bans general solicitation and advertisement of a private fundraise, with SEC requirements that publicly traded corporations keep their shareholders abreast of material developments in the business. Would it be fair to common shareholders in Fortress if only an elite crew of insiders were aware that a $5 billion fund was in the works? One legal expert on the topic calls Fortresses brief announcement ?disclosure without solicitation? ?the statement includes a note that the fund may not be sold in the US absent applicable exemption conditions.

As more private equity firms go public, there will be more disclosures of this nature. What's more, if the SEC, as expected, again pursues reforms to Regulation D, the ban on general solicitation could be essentially dropped.

A legal source says that the SEC has given certain informal indications that it is revisiting the general solicitation rule. Legal experts have long complained that the rule misses the point ?Regulation D should prohibit the sale of unregistered securities to unaccredited investors, and not concern itself with whether those investors become of aware of such a sale. There should be a rule shift from marketing to sales, these people argue. After all, in the US it is illegal for children to buy alcohol, but fine for them to see beer ads during the Super Bowl.

In any event, a fund with a, say, $25 million minimum commitment, may well benefit from some advertising, but only to a very specialized audience.