Luxury fund on offer, zero percent down!

It’s a bit silly to think private fund managers are putting the public at risk by referencing their fundraising in a public forum. Similar to the way a 14-year old understands a car commercial doesn’t mean much until a driving license is in hand, Joe Public understands some investment opportunities are simply not intended for the common investor (and even if they don’t, well, let’s be honest: Joe wouldn’t be able to purchase the Maserati on offer anyway).  

Yet a ban on general advertising and marketing of fundraising, generally referred to as “Regulation D”, prevents private equity firms from openly discussing their fundraising efforts. Historically the US Securities and Exchange Commission has argued the limitations help prevent securities fraud, ignoring the fact GPs are already bound by anti-fraud rules as well as restrictions on accepting capital from unaccredited investors.  

But now the SEC is reviewing a number of its rules as part of a wider government effort to promote small business capital formation. Just this month an SEC advisory committee concluded the agency should “take immediate action to relax or modify the restrictions on general solicitation and general advertising” in private offerings sold strictly to qualified investors. 

Welcome news for the private equity and venture capital community, but modifying Regulation D may be out of the SEC’s hands. As written, the decades-old rule offers safe harbour for “transactions by an issuer not involving a public offering” (emphasis ours). And as one astute lawyer noted in a letter to the SEC, most securities practitioners and regulators interpret a general solicitation the quintessential public offering. As such, general solicitations would be bound by a basic legal principle that restricts any exempt offering strictly to investors who, as the Supreme Court put it, are able to “fend for themselves”. It’s hard to imagine your everyday retail investor meeting that test.  

Congress could offer a way out of this legal conundrum. With the right enabling legislation, relaxations around general solicitations could secure their own legal footing. Already the lower chamber of Congress has passed a bill seeking to do exactly that. The senate, according to multiple sources we’ve spoken to, is expected to follow suit in the coming months. 

But until, and if, that legislation is signed into law, the SEC will have to square the circle on interpreting a general solicitation a non-public offering (should it in fact decide to take that route). The agency said it was aware of the concern, and “would expect these issues to be addressed during rulemaking”. 

Let’s be clear, a relaxation of general solicitation rules would not necessarily be game changing in terms of attracting LP commitments. But without reform, public-facing fund managers will have to remain tight-lipped about fundraising efforts during industry conferences, TV appearances and other public engagements – a missed opportunity to create buzz around a firm’s latest fund. In light of all the new regulations headed GPs’ way, this is one area where policymakers can, and should, reduce the red tape.