SEC lifts ban on general advertising

As expected, the Securities and Exchange Commission (SEC) voted Wednesday to end a decades-old ban on “general solicitation”, which in the past prevented general partners from freely discussing fundraising efforts and performance numbers in a public setting. 

Fund managers that want to mass advertise must file a Form D with the SEC 15 days before fundraising, and an amended Form D within 30 days after fundraising concludes (or is abandoned).

During an open meeting discussing the reforms, the agency said it would use the additional disclosures to track what strategies fund managers use in their advertising efforts, and how private issuers ensure that only “accredited investors” are sold securities, as is required under Regulation D. 

The accredited investor test has been a source of confusion for the industry. The law requires firms to take “reasonable steps” to verify that only millionaires and other wealthy investors are able to invest in private equity or hedge funds after seeing a mass advertisement. What constitutes “reasonable” however has been open to debate, but a consensus among industry sources has grown that receipt of tax returns or bank account statements from investors would be sufficient. 

During the meeting, SEC commissioners signaled a “principles-based” approach for issuers to use when verifying accredited investors – one that is “particular to the facts and circumstances of each transaction”, according to SEC chair Mary Jo White. 

Fund managers intending to mass solicit their funds, or openly discussing their performance history at industry conferences or in the media, should still bite their tongue for the time being, according to legal sources. 

“The rule will become effective 60 days after becoming published in the Federal Register,” according to Debevoise & Plimpton capital markets lawyer Matt Kaplan. Based on history, publication in the registrar takes between three to 10 days after adoption.  

The SEC also voted to ban felons and other “bad actors” who've violated federal securities laws from taking advantage of the reforms.