Getting ‘Reg D’ right

Cancel those planned billboards, newspaper advertisements and any other means of mass marketing all you fund managers who expected the US Securities and Exchange Commission (SEC) to lift the long-held ban on general solicitation this Wednesday.

Instead of immediately reforming “Regulation D” rules, the SEC said it would instead release a proposed repeal of the solicitation ban before issuing final rules (hopefully) sometime next year. With the final rule's original 5 July deadline long gone, fund managers are still beholden to an unnecessary rule prohibiting them from openly discussing their fundraising efforts.

But the request for more time should mostly be seen as a good thing. For one it eases concerns that the interim rules could have a damaging effect on investors. In a letter to the SEC The Americans for Financial Reform said that it feared “the very real risk of an upsurge in abusive private equity and hedge fund advertising and marketing practices based on misleading performance claims”.

And SEC spokesperson John Nester told PE Manager the delay provides the agency with more time to engage stakeholders on its rulemaking process; a public consultation will be launched on the proposals to facilitate dialogue. Moreover there is credibility in the SEC’s argument that the 90 day deadline provided by the JOBS act to lift the ban “did not provide a realistic timeframe” for the task at hand – which will require the preparation of an accompanying economic analysis, the proper review by the Commission, and an opportunity for public input, says Nester.

GPs should utilise the consultation period to seek clarification on how the rule will look in practice. While funds will eventually be able to market in the public sphere, many GPs wonder what the SEC’s expectations are in ensuring only accredited investors are able to commit investments. Or for that matter, what the exact definition of an accredited investor will be under the rules.

With more time, the SEC has a chance to get Regulation D reforms right. But it will require input from GPs and other stakeholders to ensure the SEC fully understands the lingering compliance questions that come with the ability to publicly market private funds.