CFTC Regulation 4.8 (“Rule 4.8”) is a little known regulation which allows CPOs to distribute disclosure documents and accept investor money prior to the NFA’s approval of the CPO’s disclosure document. In order to take advantage of Rule 4.8, the CPO must make sure that pool interests are only offered or sold to accredited investors, in a Regulation D 506 offering. The CPO will also need to initially file the disclosure document with the NFA prior to distribution to potential investors. Rule 4.8 also applies to managers using the 4.12(b) exemption (futures/commodities trading is solely incidental to securities trading and margin does not exceed 10% of pool’s NAV).
Rule 4.8 should be used sparingly, if ever. Managers should note that if Rule 4.8 is used prior to approval of the disclosure document the NFA will require the manager to provide investors in the fund with the approved disclosure document and an overview of the revisions which were made. This creates a potentially awkward situation for both the manager and the investor and may, under certain circumstance, provide the investor with a right of rescission. As with all maters in the securities industry, it is vital for a manager to provide the investor with all material information and the manager may not make any material omissions.
The full rule is reprinted below and can be found here.
Note: please see disclaimer. Mallon P.C. is not providing legal advice through this post.
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§ 4.8 Exemption from certain requirements of rule 4.26 with respect to pools offered or sold in certain offerings exempt from registration under the Securities Act.
(a) Notwithstanding paragraph (d) of §4.26 and subject to the conditions specified herein, the registered commodity pool operator of a pool offered or sold solely to “accredited investors” as defined in 17 CFR 230.501 in an offering exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 505 or 506 of Regulation D, 17 CFR 230.505 or 230.506, may solicit, accept and receive funds, securities and other property from prospective participants in that pool upon filing with the National Futures Association and providing to such participants the Disclosure Document for the pool.
(b) Notwithstanding paragraph (d) of §4.26 and subject to the conditions specified herein, the registered commodity pool operator of a pool offered or sold in an offering exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 505 or 506 of Regulation D, 17 CFR 230.505 or 230.506, that is operated in compliance with, and has filed the notice required by §4.12(b) may solicit, accept and receive funds, securities and other property from prospective participants in that pool upon filing with the National Futures Association and providing to such participants the Disclosure Document for the pool.
(c) The relief provided under §4.8 is not available if an enforcement proceeding brought by the Commission under the Act or the regulations is pending against the commodity pool operator or any of its principals or if the commodity pool operator or any of its principals is subject to any statutory disqualification under §§8a(2) or 8a(3) of the Act.
[57 FR 34865, Aug. 7, 1992; 57 FR 41173, Sept. 9, 1992, as amended at 60 FR 38182, July 25, 1995; 72 FR 1662, Jan. 16, 2007]
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Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.