A common question from start-up hedge fund managers is what kind of a website can I have and how do I go about getting investors through an internet solicitation? The unfortunate answer is that hedge fund managers must be very careful when they are designing their website. In general, websites for a hedge fund or a hedge fund manager need to be very low key and potentially password protected. This is especially important in the current regulatory enviornment because securities officials, at both the federal and state level, are becoming more and more vigilant about enforcing the website solicitation rules. This article will briefly detail the legal background and some website best practices.
Regulation D – no “public offering”
Most hedge funds are offered to investors through a Regulation D private placement offering. One of the requirements of the Reg. D offering is that the sale of securities (interests in the hedge fund) is not done through a “public offering.” While there is no exact definition of “public offering,” it will generally mean that the hedge fund is not allowed to offer or sell interests through general solicitation or general advertising. According to the SEC, the analysis can be broken down into two main questions: (i) is a communication a general solicitation or advertisement, and, if so, (ii) is it being used to offer or sell securities? If the answer to either of these questions is negative, the fund is not in violation of public offering rules.
Regulation D – the “pre-existing” relationship
If a private placement is offered to potential investors with whom the hedge fund manager has no pre-existing relationship, the SEC may conclude that there was a general solicitation in violation of the Reg D rules.
Frequently, an issuer can satisfy the pre-existing relationship requirement through prior investment or other business dealings with the potential purchaser. The pre-existing relationship generally involves at least some degree of contact between the issuer and the prospective purchaser prior to the offering – generally 30 days from a “first contact.”
[HFLB note: there are a couple of very important no-action letters on this subject. I will be posting these in the next couple of days.]
Website Best Practices
We will generally recommend that all web presence be minimized. The two most important principles with regard to web presence and web communications are (1) do not name the hedge fund and (2) do not personally, or by fiat, write that you manage a hedge fund. Besides those two overriding items, we recommend that the web presence is minimal at all times. However, we are aware that from a business standpoint, the manager would like to have a web presence.
There are five important parts to a hedge fund website:
The Splash Page
The hedge fund manager should have an initial “splash page” which might include the name of the management company (do not say you are an “investment advisor” unless registered as such in your state of residence or with the SEC). The splash page should include very minimal information.
Note: you should not include your phone number or contact information on this splash page.
This page should have questions to determine if a viewer is qualified to be viewing the fund’s information over the internet. Generally this will include the accredited investor qualifications; it may also mean that the qualified client qualifications are also included.
Login Page (may be on the splash page)
This page will be for viewers who are either currently invested in your fund or who have met the qualifications of registration.
Password protected content
All identifying information of the fund and management company should be password protected. You should never post the fund’s offering documents on the internet unless there are stringent controls in place to make sure that the offering documents can only be viewed by the one investor they are intended for – even if there are these stringent controls, we would normally recommend against this practice.
The site should have a general disclaimer which should be prepared by an attorney. Additionally, all performance information within the password protected portion of your website should have all appropriate disclaimers.
Note: it is recommended that once you have an almost final draft of the website, you should have your lawyer review before it goes live.
Legal Developments and Conclusion
The regulators are very sensitve about website solicitations. For example,the State of Massachusetts is trying to fine activist hedge fund manager Phillip Goldstein, of Bulldog Investors, because of how he designed his fund’s website. The famed investment adviser is under prosecution by Massachusetts for allowing potential investors unrestricted access to Bulldog’s website. [HFLB to insert the complaint.]
Because of this and other activity it is extremely important that you have your hedge fund attorney discuss the website rules with you. Please contact us if you have further questions or if you would like help launching your hedge fund website.