Monthly Archives: July 2013

JOBS Act Proposed Regulations Passed

Fund Managers Allowed to Advertise According to New Rules

Additional Regulations Proposed by SEC

The long-awaited JOBS Act proposed regulations which will allow private fund managers to generally solicit investors for a private fund offering were finalized today.  In addition, the SEC proposed additional regulations with respect to offerings in which there has been a general solicitation.

We will be able to provide more detailed information on these developments over the coming days, but for now the following links provide helpful information:

  • SEC Adopting Release – Release No. 33-9415; No. 34-69959; No. IA-3624; File No. S7-07-12RIN 3235-AL34; Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings
  • SEC Proposing Release – Release No. 33-9416; Release No. 34-69960; Release No. IC-30595; File No. S7-06-13 RIN 3235-AL46;Amendments to Regulation D, Form D and Rule 156 under the Securities Act
  • JOBS Act Ban on General Solicitation Lifted for Fund Managers – blog post from Sansome Strategies (compliance firm)

Below is some direct language from the adopting and proposed releases.  Please contact us if you have questions on the releases or how they may relate to a proposed offering.


Adopting Release (regulation effective 60 days after publishing in Federal Register)

SEC Summary:

The amendment to Rule 506 permits an issuer to engage in general solicitation or general advertising in offering and selling securities pursuant to Rule 506, provided that all purchasers of the securities are accredited investors and the issuer takesreasonable steps to verify thatsuch purchasers are accredited investors. The amendment to Rule 506 also includes a non-exclusive list of methods that issuers may use to satisfy the verification requirement for purchasers who are natural persons. … We are also revising Form D to require issuers to indicate whether they are relying on the provision that permits general solicitation or general advertising in a Rule 506 offering.

New Regulation 506(c)(2)(ii) will read as follows:

The issuer shall take reasonable steps to verify that purchasers of securities sold in any offering under paragraph (c) of this section are accredited investors. The issuer shall be deemed to take reasonable steps to verify if the issuer uses, at its option, one of the following non-exclusive and nonmandatory methods of verifying that a natural person who purchases securities in such offering is an accredited investor; provided, however, that the issuer does not have knowledge that such person is not an accredited investor:

(A) In regard to whether the purchaser is an accredited investor on the basis of income, reviewing any Internal Revenue Service form that reports the purchaser’s income for the two most recent years(including, but not limited to, Form W-2, Form 1099, Schedule K-1 to Form 1065, and Form 1040) and obtaining a written representation from the purchaser that he or she has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year;

(B) In regard to whether the purchaser is an accredited investor on the basis of net worth, reviewing one or more of the following types of documentation dated within the prior three months and obtaining a written representation from the purchaser that all liabilities necessary to make a determination of net worth have been disclosed:

(1) With respect to assets: bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments, and appraisal reports issued by independent third parties; and

(2) With respect to liabilities: a consumer report from at least one of the nationwide consumer reporting agencies; or

(C) …

(D) In regard to any person who purchased securities in an issuer’s Rule 506(b) offering as an accredited investor prior to the effective date of paragraph (c) of this section and continues to hold such securities, for the same issuer’s Rule 506(c) offering, obtaining a certification by such person at the time of sale that he or she qualifies as an accredited investor.

New Regulation Proposal Release (comment period open for 60 days)

SEC Summary:

… the[se] proposed amendments to Regulation D would require the filing of a Form D in Rule 506(c) offerings before the issuer engages in general solicitation; require the filing of a closing amendment to Form D after the termination of any Rule 506 offering; require written general solicitation materials used in Rule 506(c) offerings to include certain legends and other disclosures; require the submission, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the Commission; and disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with Form D filing requirements in a Rule 506 offering. The proposed amendmentsto Form D would require an issuer to include additional information about offerings conducted in reliance on Regulation D. Finally, the proposed amendments to Rule 156 would extend the antifraud guidance contained in the rule to the sales literature of private funds.


Cole-Frieman & Mallon LLP is a boutique law firm focused on providing legal services to private fund managers.  Bart Mallon can be reached directly at 415-868-5345.

Hedge Fund Advertising After SEC JOBS Act Vote

One of the most anticipated votes for the hedge fund industry is happening today when the SEC votes on the JOBS Act implementing regulations (for information on the proposed changes, please click here).  Presumably the SEC will allow certain private fund managers to generally solicit which means that managers will have expanded options when it comes to advertising.  This is expected to create a new category of service providers to fund managers seeking to maximize visibility.

We will of course continue to provide information on the new regulations as soon as they are released.  Below is a guest post from Mark Macias which highlights certain marketing strategies that managers might want to consider after the JOBS Act vote.


How to Prepare for the Anticipated SEC Changes on Hedge Fund Advertising
By Mark M. Macias

Most hedge funds, private equity groups and venture capitalists will be at a disadvantage when the SEC lifts the prohibition on general solicitation, which is expected to occur in 2013. The decades-old marketing ban has prevented many financial groups from developing an online infrastructure that is crucial to marketing a service to investors.

Marketing a fund with the media is drastically different than marketing a product to the public. Credibility must be established from the start before the media will even consider putting your portfolio manager on TV or quoting him as a financial expert. He may manage a $100 million portfolio, but the media is not going to take his word for it without seeing evidence of his expertise. This is why it’s so crucial for all funds to establish credibility now with a strong online presence before the new proposed SEC rules on advertising go into effect.

Here are some marketing strategies your fund should consider as it undergoes an online marketing and media campaign to reach new investors.

First – the media. Credibility matters in life, but it especially matters for journalists. Whenever a portfolio manager is pitched as an expert to the media, journalists will quietly and overtly measure his expertise, integrity and experience in the financial industry. Journalists will want to see proof on why this portfolio manager should be the best expert to add color to the market.

This is why your fund needs to establish a website now to start building credibility in the online world. If a reporter doesn’t see an online presence on your fund, credibility questions will be raised. This doesn’t mean you won’t succeed with a media placement, but it will be a much harder story sell to the media if you can’t support or show why your fund manager is an expert. You can establish credibility quickly by writing editorials on the market and submitting them to influential business news sites, like the Huffington Post, Business Insider, trade magazines, etc. Writing a book on your industry will also give you another avenue to position yourself as an expert.  Here are a few credibility questions you should be able to address and answer before your fund pursues media placements.

  • What makes you qualified to speak on this topic?
  • How many years of experience have you spent in the industry?
  • How big is your fund in comparison to others?
  • What part of your daily routine is spent reinforcing your expertise?
  • What do you know as an insider that other investors would want to know?

Once you establish credibility, how do you get the media’s attention? How do the news producers and newspaper editors decide what to print and publish? Most people ask this question like there is a magical formula that scientifically reveals whether a story should be pursed or scrapped. If it were this easy to identify news stories, you can bet the formula would have been hacked and posted on the Internet by now. The fact is news selection is an art and just like any other profession, involving creativity, opinions and experiences, it is subjective to where you stand.

News is a public service, which means your story must provide a service to the public. It sounds simplistic, but many people don’t grasp that concept. They assume the media is entitled to do feature stories on the public in the name of public service. No, the media is entitled to do stories that benefit and help the public with information that is relevant today. And in today’s saturated media market where ratings and unique viewers drive advertising rates, a story idea will have a better chance of getting picked up by the media if it has an inherent tease value. In essence, this is a story that draws readers in because they are intrigued.

One of the biggest factors that will decide whether a story makes the evening news or morning newspapers involves timeliness. News is from the root “new,” which means you must find a new and unique element to pitch if you expect the media to pursue a story on you or your fund. If your story is old news, then you need to find a new way to spin it by finding an angle that is tied to a timely matter. For example, if you are a Middle East fund, trying to get publicity in the US, tie your fund to a current event. Currently, there are protests throughout Turkey and Egypt. What are these protests doing to the stock market in those countries? How will a new leader in those countries impact the economic stability? How is the (local) currency market reacting on the international stage? Those are all questions you can pose to position your portfolio manager as an expert and in a timely manner. Here are a few questions to help you discover a newsworthy angle for your fund.

  • What is different about my fund? How does this personally relate to investors reading this publication? The more you can define it, the better your chances for a successful media placement.
  • How does my fund impacted by international events?
  • What is the timely element with my fund?
  • Is there a personal story to tell about my fund, like maybe the portfolio manager has overcome a personal obstacle or has survived through several decades of difficult financial times? What can we learn from this portfolio manager?
  • Is there a new trend arising in my field that will affect the pocket books of consumers? For example, is the rising cost of wheat starting to put a damper on profits for bagel shop or Italian restaurant owners? Will my business soon be forced to raise prices on the menus because the price of wheat keeps rising?
  • Does your fund have a direct impact on technology, materials or energy, reshaping the future? If so, what is that innovation and how will it change lives? What trend is it leading?

Finding a unique angle is not as difficult as it may sound. You just need to open your mind to timely events that impact and influence your fund. If your fund is geared towards a niche audience, like cyber security, scan the headlines in the business sections of various newspapers for possible tie-ins to current events.

The founder of MACIASPR, Mark M. Macias, has worked inside the newsrooms of NBC, CBS, KTVK, the Arizona Republic and King World Productions. As the Executive Producer with WNBC in New York, Macias approved and vetted story ideas from publicists, reporters, producers and viewers. He was also Executive Producer for a national business show that was syndicated by NBC. You can read more on his PR Firm at


Cole-Frieman & Mallon LLP is a boutique law firm focused on the investment management industry.  Bart Mallon can be reached directly at 415-868-5345.

Second Quarter 2013 Business & Regulatory Update

Below is the second quarter update we have sent out to our mailing list.  If you would like to be added to the mailing list, please contact us here.


Cole-Frieman & Mallon Second Quarter Update

Clients and Friends:

In the second quarter of 2013 we have seen accelerating activity in the world of investment management regulatory compliance. As we move into the third quarter, we would like to provide you with a brief overview of some items that we hope will help you stay on top of the business and regulatory landscape in the coming months.


Foreign Account Tax Compliance Act (“FATCA”) Deadline Approaching. Foreign financial institutions (“FFIs”) such as offshore funds may be subject to a 30% U.S. withholding tax on payments they receive from U.S. sources as soon as January 1, 2014 if they fail to complete the following steps before October 25, 2013: (1) register with the IRS through an online web portal which will become available on July 15, 2013; (2) enter into an FFI agreement with the IRS via the web portal, or comply with an applicable intergovernmental agreement; and (3) meet the other due diligence, reporting and withholding requirements under FATCA. Offshore fund managers should contact their tax advisers as soon as possible to prepare for FATCA compliance and, if required, to register with the IRS between July 15 and October 25, 2013. In addition, fund managers to domestic funds should work with their tax advisers, administrators and legal counsel to properly address the new account onboarding and due diligence procedures required under FATCA, including updating their offering documents and subscription materials.

JOBS Act Update. The Jumpstart Our Business Startups Act (the “JOBS Act”) was signed into law over a year ago (April 5, 2012) but the SEC has not yet issued implementing regulations. On Wednesday, May 15 the House of Representatives expressed its frustration with the slowness of this process by passing H.R. 701, a House Resolution requiring the SEC to finalize regulations with respect to “Regulation A+” of the JOBS Act. Regulation A+ refers to the part of the JOBS Act which creates a new category of exempt public securities offerings of up to $50 million raised over a 12-month period. In effect this is an expansion of the current “Regulation A” exemption for offerings of up to $5 million over a 12-month period. For fund managers, it remains to be seen whether Regulation A+ might challenge the predominant practice of relying on the exemption “safe harbor” under Rule 506 of Regulation D of the Securities Act of 1933. For more information, please refer to our blog article on this topic.

New “Red Flag” Rules for Identity Theft. The SEC and CFTC released joint final regulations (“Regulation S-ID”) requiring “financial institutions” and “creditors” regulated by the SEC or the CFTC to put in place programs to address identity theft risk in any “covered accounts.” The terms “financial institutions” and “creditors” cover a wide range of participants in the investment management industry, including certain investment advisers, commodity pool operators, commodity trading advisers, broker-dealers and futures commission merchants (among others). The definition of the term “covered accounts” is broad and includes brokerage accounts with a broker-dealer and margin accounts. Most importantly, to comply with the new regulations, a program must be put in place which includes reasonable policies and procedures to do the following: (1) describe relevant “red flag” situations that, if they arise, could indicate a risk of identity theft; (2) detect such red flags as they arise, (3) respond appropriately to red flags, and (4) periodically update the program. Compliance with the new regulations will become mandatory on November 20, 2013. Persons affected by these “Red Flag” rules should take the next few months to assess their compliance programs to ensure adequate systems are in place to address identity theft risk.

Futures and Derivatives. Futures and derivatives regulators and self-regulatory organizations have continued to be very busy over the last quarter. Important developments include:

  • Filings for Newly-Registered CPOs. All CPOs who became registered on January 1, 2013 or during Q1 2013 were required to make their first Form CPO-PQR filing before May 31, 2013. This requirement applies to CPOs relying on the CFTC Rule 4.7 exemption from certain reporting and disclosure requirements. The next due date for Form CPO-PQR is August 29, 2013. If you are a CPO and have not met your filing requirements or would like assistance with the August filing, please do not hesitate to contact us.

  • Changes to CPO Filings. All CPOs must make quarterly filings through the NFA’s EasyFile system for CPOs, and the due dates of such filings and the information required in them varies depending on the CPO’s aggregate pool assets under management. Prior to the recent rule amendments, CPOs were faced with separate quarterly reporting forms from the NFA and the CFTC, along with different filing deadlines. The distinction between the NFA version and the CFTC version of the form still exists; however, each version has been amended to incorporate certain information required by the other regulator. In addition, the NFA changed certain of its filing deadlines to match CFTC deadlines. The NFA also added a “cover page” to the EasyFile system with questions on the CPO’s aggregate pool assets under management, and based on the CPO’s responses the system automatically determines which version of the Form CPO-PQR needs to be filed. The NFA published a chart and other guidance to assist filers with the changes.
  • Upcoming Changes to CTA Filings. The NFA’s recent Notice states that CTAs will soon be required to file Form CTA-PR with the NFA on a quarterly basis, whereas currently this form is filed annually. However, this rule is not yet in effect. The NFA has stated it will send out an alert well in advance of the effective date. When the new rule goes into effect, CTAs will need to file the Form CTA-PR via the NFA’s EasyFile system for CTAs within 45 days of the end of each calendar quarter.
  • Equity Total Return Swaps and CPO Exemption. As of June 30, 2013 equity total return swaps on foreign securities became designated as “mixed swaps” subject to both SEC and CFTC jurisdiction. As a result, they are no longer exempt from being counted toward the de minimis exemption from CPO registration under CFTC Rule 4.13(a)(3). Fund managers that rely on this exemption from CPO registration and that advise funds trading in equity total return swaps should assess their funds’ exposure to these instruments to determine whether they can continue relying on the de minimis exemption.
  • ISDA March 2013 Dodd-Frank Protocol. The International Swaps and Derivatives Association’s Dodd-Frank Documentation Initiative aims to facilitate compliance with the Dodd-Frank Act. The Documentation Initiative minimizes the need for bilateral negotiation and reduces disruptions to trading by providing a standard set of amendments, referred to as protocols, to update existing swap documentation. The first such protocol was the ISDA August 2012 Dodd-Frank Protocol (the “Protocol 1.0”), which had an effective compliance date of May 1, 2013. The ISDA March 2013 Dodd-Frank Protocol (the “Protocol 2.0”) is now open for adherence, and its compliance date is July 1, 2013. This means that swap dealers will require client adherence to both Protocol 1.0 and Protocol 2.0 as of July 1, 2013. To indicate participation in Protocol 2.0, market participants must respond to the Protocol 2.0 questionnaire, submit an adherence letter and pay an adherence fee of $500.00 through the online ISDA Amend system. Detailed instructions can be found here.

Cash Solicitation Rule in California. There are many potential legal pitfalls involving relationships between investment advisers and third party marketers. One such pitfall involves Rule 206(4)-3 of the Investment Advisers Act of 1940, known as the “cash solicitation rule,” which, among other rules, requires that clients must receive written notice of any referral fees paid to marketers. A recent case from the California Court of Appeals, Lloyd v. Metropolitan West Asset Management, LLC highlights at least two important take-aways with respect to the cash solicitation rule. First, the manager could not prove that the client actually received the required notice, emphasizing the importance of documenting such processes and to contractually sharing the burden of such compliance with marketing firms. Second, the court found that the cash solicitation rule applied despite the fact that the client at issue was a non-U.S. client.

New Front-Running Rule for Broker-Dealers. FINRA issued a new rule on front-running of customer block transactions (“Rule 5270”), which took effect on June 1, 2013. Rule 5270 expands the prohibition on front-running by, among other changes, applying the prohibition to fixed income securities and related instruments. It also lays out three categories of “permitted transactions” in which FINRA member firms may engage: (1) transactions that a firm can demonstrate are unrelated to the customer block order; (2) transactions that are undertaken to fulfill or facilitate the execution of the customer block order; and (3) transactions that are executed, in whole or in part, on a national securities exchange and comply with the marketplace rules of that exchange. More information on Rule 5270, including the full FINRA notice, can be found here.

European Union’s Alternative Investment Fund Managers Directive (“AIFMD”). Starting July 22, 2013, managers marketing alternative investment funds in the EU must comply with reporting and disclosure obligations under the AIFMD. These obligations consist of providing pre-investment and ongoing disclosures to investors, complying with requirements affecting manager remuneration, and preparing annual and regular reports to an EU national regulator.  As a caveat, however, full compliance with the AIFMD may be insufficient for certain managers, because until July 21, 2015, the ability to market to EU investors is still subject to the national law of the jurisdiction where the investor is located. There has been speculation that some countries may move to restrict marketing efforts by US-based managers and/or funds. If you are marketing to EU investors, you should carefully review the directive’s provisions as well as applicable national laws to make sure you comply with all requirements.

Launch of Sansome Strategies LLC.   We are pleased to announce the launch of our affiliated compliance consulting company, Sansome Strategies LLC (“Sansome Strategies”). Sansome Strategies specializes in high-touch, outsourced compliance services for firms in the investment management industry. In addition to working with registered investment advisers and hedge fund managers, Sansome Strategies will also focus on firms operating in the commodities/futures and derivatives spaces.

Further information about Sansome Strategies can be found at:

Please also visit the Sansome Strategies blog:

Compliance Calendar. As you plan your regulatory compliance timeline for the coming months, please keep the following dates in mind:

Deadline Filing
July 1, 2013 Dodd-Frank Protocol 2.0 adherence deadline
July 15, 2013 IRS FATCA online registration portal available
August 29, 2013 Form PF (large funds) & Form CPO-PQR due
October 25, 2013 Deadline for registration via IRS FATCA online portal
November 20, 2013 “Red Flag” Rule compliance deadline
Periodic Filings Form D and Blue Sky filings should be current

Please contact us with any questions or for assistance with any compliance, registration or planning issues on any of the above topics.


Karl Cole-Frieman & Bart Mallon


Cole-Frieman & Mallon LLP is a premier boutique investment management law firm, providing top-tier, responsive and cost-effective legal solutions for financial services matters.

Hedge Fund Events July 2013

The following are various hedge fund events happening this month. Please email us if you would like us to add your event to this list.


July 2

July 8-9

July 8-10

July 9

July 10

July 11

July 11

July 16

July 17

July 17

July 18

July 18

July 20

July 21

July 22-23

July 22-24

July 22-24

July 22-24

July 22-24

July 24

July 24

July 25-26

July 30-31

July 31-August 1


Cole-Frieman & Mallon LLP provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.