Remaining muted

Last Monday was “general solicitation day”. Finally, after 80 long years, the muzzle was removed from GPs wanting to broadcast their fundraising efforts.

The only condition? Make sure whoever commits money to the fund is wealthy and sophisticated enough to bear the risks that come with alternative asset investments. In other words: put in place some reasonable controls that prevent 'mom and pop investors' from handing over their nest egg.

That seemed a sensible compromise to Congress when it overwhelmingly approved the Jumpstart Our Business Startups (JOBS) Act, signed into law by President Obama last April. It’s quite rare for Congress to agree on anything these days. But JOBS – which lifted a general solicitation ban on private issuers relying on Regulation D – passed the Senate by a 73-26 vote, and sailed through the House 390-23. That's about as bipartisan as it gets.

Nonetheless, the US Securities and Exchange Commission went above and beyond its congressional mandate by floating some proposals soon after lifting the ban, which have left fund managers less than thrilled about the opportunity to mass-market their funds. And unless these proposals are watered down – or scrapped altogether – many fund managers tell PE Manager they remain in a 'wait and see' mode before giving a general solicitation strategy any significant thought.

That is a shame. Lifting the general solicitation ban does many positive things – perhaps chief amongst them the opportunity for GPs to use the internet, social media and other public channels to reach accredited investors at a time when some of the industry's biggest backers are pulling out of the asset class (some due to new regulations like the still pending Volcker rule). 

Another major benefit is the ability for GPs to speak in a public forum without worrying about SEC sanctions, an outcome that would shed more light on an industry often criticized for being opaque. And for publications that cover private equity daily (*cough*), it represents an opportunity to speak to GPs more freely about their performance on the fundraising trail. But instead, the conversation has been about how the new proposals, if adopted, would make it “more difficult to raise capital under Regulation D than it was before the JOBS Act,” as the PEGCC put it recently.

So what's on the table? The SEC wants issuers to file forms 15 days before publicly discussing raising money, and then to include certain legends and disclosures in their mass marketing material. That virtually excludes potential fundraising channels like Facebook and Twitter, the formats of which do not lend themselves well to boilerplate legal disclaimers.

The proposals also include a stringent one-year ban on any issuer from relying on Regulation D for non-compliance – which seems especially harsh considering the SEC has failed to create clear guidance on what exactly constitutes general solicitation. As the PEGCC noted in its letter, this may lead GPs to make “defensive” filings just in case they inadvertently violate the rules. In the past, private equity professionals may have slipped up when speaking in public about fundraising and gotten away with it; but the SEC is warning that general solicitation will be a focus of scrutiny now that the ban is lifted. And if every GPs ticks the general solicitation box on Form D, just to play it safe, it will clog SEC resources and distort the picture of which private issuers are actually interested in hitting the public airwaves. 

The bottom line is that, at least for the most part, private equity fundraising is a relationship-based business – where the vast majority of those invited to play are institutional or super-rich investors who understand the rules of the game. Congress was right to recognize this last year, when it decided to allow GPs to speak more freely about their marketing activities. The SEC should now do the same – or at the very least, not introduce conditions so onerous that it prevents the rule changes from having the desired effect.