Tag Archives: JOBS Act

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.

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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.

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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.

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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.

ABOUT THE AUTHOR
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 www.MaciasPR.com.

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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.

Regulation A+ Deadline Passed by Congress

Part of JOBS Act Regulations to be Finalized by October 31, 2013

On Wednesday May 15, the House of Representatives passed H.R. 701 which requires the SEC to finalize regulations with respect to “Regulation A+” of the JOBS Act. Regulation A+ would allow companies to more effectively raise money from the public, increasing the current offering limit of $5 million over 12 months to a limit of $50 million over 12 months.

House Statement on Regulation A+

The House Financial Services Committee released a statement which includes the following:

Specifically, H.R. 701 requires the SEC to implement Title IV of the JOBS Act by October 31, 2013. Title IV requires the SEC to adopt or amend regulations to encourage capital formation without requiring an SEC registration statement. These exemptions, referred to as “Regulation A+,” create a new category of public offerings exempt from SEC registration of up to $50 million raised over a 12-month period through issuance of equity securities, debt securities or debt securities convertible or exchangeable to equity interests, including any guarantees of such securities. Under current law, Regulation A provides a similar exemption for public offerings up to $5 million over 12 months.

To protect investors, the JOBS Act requires companies that make offerings under Regulation A+ to file audited financial statements with the SEC on an annual basis and gives the SEC the ability to require these issuers to make periodic disclosures about their operations, financial condition, use of proceeds and other information it deems appropriate.

What this means for the hedge fund industry

Right now this means little to the hedge fund industry except perhaps that Congress is getting tired of the SEC dragging their feet with respect to implementing the JOBS Act. As we have discussed previously, the major provision for fund managers is going to be the lifting of the ban on general solicitation. Perhaps this action indicates that Congress is going to continue to push the SEC to finalize all of the provisions of the JOBS Act.

Additionally, depending on the final Regulation A+ regulations, fund managers may be more inclined to start using that exemption instead of Rule 506 Regulation D, which is the de facto safe harbor used by fund managers. Our guess is that we will not see any real action on this issue until after mid-year and so we cannot know how this particular regulation may or may not affect managers for a few months.

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Cole-Frieman & Mallon LLP provides legal advice to the hedge fund industry.  Bart Mallon can be reached directly at 415-868-5345.

JOBS ACT – SEC Proposes New Changes to Rules 506 and 144A

The JOBS Act, enacted earlier this year, directed the SEC to remove prohibitions on general solicitation and general advertising and revise rules on the resale of securities by large institutional investors. On August 29th, the SEC issued a proposed rule to modify Rules 506 and 144A of the Securities Act, which deal with general solicitation and advertising and resales of securities by large institutional investors, respectively.

Rule 506

Under the proposed rule, companies issuing securities would be permitted to use general solicitation and general advertising to offer securities if the following conditions have been met:

  • The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.
  • All purchasers of securities are accredited investors, because either:
    • They come within one of the categories of persons who are accredited investors under existing Rule 501.
    • The issuer reasonable believes that the meet one of the categories at the time of the sale of the securities.

The proposed rule would use a set of factors to determine if an issuer has taken the necessary steps to verify a purchaser is an accredited investor. These factors include:

  • The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.
  • The amount and type of information that the issuer has about the purchaser.
  • The nature of the offering, meaning:
    • The manner in which the purchaser was solicited to participate in the offering.
    • The terms of the offering, such as a minimum investment amount.

Form D

The proposed rule would also affect Form D, which issuers must file with the SEC when they sell securities under Regulation D. The revised form would contain a new separate box for issuers to check if they are claiming the new Rule 506 exemption that would permit general solicitation and general advertising.

Rule 144A and QIBs

The Rule 144A exemption is a safe harbor under Section 5 of the Securities Act of 1933 that essentially allows unlimited resales of certain unregistered securities of US and foreign issuers not listed on a US securities exchange or quoted on a US automated inter-dealer quotation system to “qualifying institutional buyers” (QIBs). A QIB is an entity acting for its own account or the accounts of other qualified institutional buyers that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity. For hedge funds and private funds this means an unregistered fund or entity that owns or invests at least $100 million in securities of unaffiliated issuers and a registered fund manager acting for its own account or the accounts of other QIBs that in the aggregate owns and has discretions over at least $100 million in securities of unaffiliated issuers. Even if a manager is a QIB, each fund itself must have $100 million in securities to qualify as a QIB.

Under the proposed rule, offers of securities could be made to investors who are not QIBs as long as the securities are sold only to persons whom the seller and any person acting on behalf of the seller reasonably believe are QIBs.

Conclusion

The modification of Rule 506 would allow companies to advertise and solicit the sales of securities in ways that they had not been able to do so previously. The effect on Rule 144A would be to permit the offers of securities to investors who are not QIBs but persons whom the seller reasonably believes are QIBs.

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Cole-Frieman Mallon & Hunt LLP, an investment management law firm which provides legal services to the hedge fund industry. Bart Mallon can be reached directly at 415-868-5345.

 

Hedge Fund JOBS Act Panel Event

100 Women in Hedge Funds Event in San Francisco

Below is information on the 100 Women’s event in San Francisco next week. The panel event will discuss how the JOBS Act will affect hedge fund managers. The JOBS Act may be the most discussed issue right now in the hedge fund space, especially as managers wait for rule making from the SEC. Such rule making is expected to outline the requirements for managers wishing to publicly advertise their hedge fund products. For more information, please also see our other posts on this topic:

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Education Session No. 340: The JOBS Act: Putting It to Work for Private Funds

May 22, 2012 at 6 PM

San Francisco CA

On April 5, 2012 President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. Silicon Valley firms and the National Venture Capital Association lobbied strongly for passage of the Act, arguing that it will ease the regulatory burdens on emerging companies and facilitate capital formation. The Act also eliminates the restrictions on marketing that most private fund managers have in place to ensure a Reg D private placement.

Our panelists will discuss the implications of the Act on venture capital, private equity and hedge fund managers, and their portfolio companies. They will address how the Act facilitates earlier access to capital and easier exits by start-ups and smaller companies, and the broader marketing opportunities the Act will give private fund managers.

Participants

Emily Chang, Moderator, Bloomberg

Susan Mac Cormac, Morrison & Foerster

Carter Mack, JMP Group

Rachel Sheinbein, CMEA Capital

Event Details

Date: May 22, 2012

Time: 5 PM Registration.

We will begin promptly at 6 PM; please arrive early. Since it is disruptive to everyone when latecomers enter the session, those arriving after an education session has begun will only be admitted at the discretion of 100WHF and the host. Please note the start time on this invite and plan to arrive early.

Host: Morrison & Foerster

Location: 425 Market Street, San Francisco, CA 94105 – Directions

RSVP: RSVP Now

If you have any questions about this event, please contact the California, North committee.

This event is NOT FOR ATTRIBUTION.

Admission is free, but there is a $25 charge if you register and do not attend, even if you cancel in advance. No-show proceeds will be donated to DonorsChoose.org, the 2012 beneficiary of 100WHF’s US philanthropic initiatives.

If you have no-show fees in arrears, the system cannot register you for an event. You can view and pay for any outstanding no-show fees online from your Member Profile

Space is limited. No walk-ins will be permitted.

Biographies

Emily Chang, Anchor of “Bloomberg West”, Bloomberg

Emily Chang is the San Francisco-based anchor of “Bloomberg West,” the hour-long weekday technology program airing at 3pm PT/6 pm ET from Bloomberg TV’s studios in San Francisco. Chang reports on global technology, software and Internet companies as well as trends in social media, entertainment and mobile technology. She also regularly speaks to top tech executives, investors and entrepreneurs. Chang’s interviews include Twitter Executive Chairman and co-founder Jack Dorsey, venture capitalist Marc Andreessen, Comcast CEO Brian Roberts, eBay CEO John Donahoe and Research in Motion CEO Jim Balsillie.

Before joining Bloomberg in 2010, Chang served as an international correspondent for CNN in Beijing. There, she reported on a wide range of stories, including China’s economic transformation and its impact on Chinese society, politics and the environment. Chang has also reported for CNN in London, where she covered international news for CNN’s “American Morning” program.

Prior to joining CNN in 2007, Chang served as a reporter at KNSD, NBC’s affiliate in San Diego, California. There, she filed reports for MSNBC and won five regional Emmy Awards for news writing, health and science and consumer business reporting. Earlier in her career, Chang reported in Honolulu, Hawaii; Birmingham, Alabama and trained as a news producer at NBC in New York.

Born and raised in Kailua, Hawaii, Chang graduated magna cum laude from Harvard University.

Susan Mac Cormac, Partner; Co-Chair Business Department, Morrison & Foerster

Susan Mac Cormac is a partner in the Corporate Group of Morrison & Foerster’s San Francisco office. She serves as co-chair of the Firm’s 550 lawyer Business Department, and co-chair of the Cleantech Group. She has extensive experience representing start-up to late-stage private companies primarily in the Cleantech or sustainable space, including Arcadia, ClimateEarth, driptech, ElectraTherm, enXco, OneSun, Revolution Foods, and SourceTrace. She also represents impact investors such as Capricorn/Virgo, Brightpath Capital Partners, Pacific Community Ventures, RSF Social Finance, and OPIC. She provides corporate and finance advice in connection with mergers, acquisitions, asset purchases and sales, reorganizations, joint ventures, and equity and debt financings.

Ms. Mac Cormac was named by California Lawyer Magazine as one of the 2012 California Lawyers of the Year for her effective legislative change in California as co-chair of the Working Group for the Flexible Purpose Corporation. She was recognized by the Daily Journal as one of the Top Female Attorneys in California (May 2011) and as one of the Top 25 Clean Tech Lawyers in California (March 2011). Ms. Mac Cormac was named to The American Lawyer’s “45 Under 45” list of outstanding women lawyers (January 2011) and selected by her peers for Best Lawyers in America 2011. She was also recognized by clients in Legal 500 United States 2009 and 2010 for her expertise working with venture capitalists and emerging companies.

Ms. Mac Cormac serves as co-chair of the Working Group and has spent 500 pro bono hours over the past three years drafting a new corporate form for California: the Flexible Purpose Corporation. She is on the Board of Directors of the Sustainability Accounting Standards Board (“SASB”) and the Biomimicry Institute.

Carter Mack, President, JMP Group

Carter Mack is a co-founder of JMP Group and serves as its President. He is also a member of the executive committee of JMP Group and serves on its board of directors. From the company’s inception in 1999 through 2010, Carter served as Director of Investment Banking at JMP Securities; and, from 2007 through 2010, he additionally served as Co-President of JMP Securities.

Recently served as one of three investment banking members of the IPO Task Force which provided a series of recommendations on ways to improve the IPO market in a report to the US Treasury Department in October 2011. The IPO Task Force recommendations were incorporated into the JOBS Act which was signed into law in April 2012.

Prior to founding JMP, Carter served as a Managing Director in the financial services investment banking group at Montgomery Securities, now Banc of America Securities, from 1996 to 1999. He previously spent five years in investment banking at Merrill Lynch focused on financial institutions. During his career, Carter has been involved in corporate finance and merger and acquisition transactions totaling more than $40 billion in value.

Carter holds an MBA from the UCLA Anderson School of Management and a BA from the University of California, Berkeley.

Rachel Sheinbein, Partner, CMEA Capital

Rachel Sheinbein is a Partner with the Energy and Materials team at CMEA Capital. She is a board member for Solaria, Danotek Motion, Contour Energy and Arcadia Biosciences and an observer for Reel Solar. Before CMEA, Rachel was a consultant for start-ups in the areas of bio-plastics, solar and water. For 9 years prior, Rachel worked at Intel, in wastewater systems, Environmental Health & Safety, and Supply Chain IT.

Rachel is the President of the board of Expanding Your Horizons Network, a non-profit that encourages girls in math, science, engineering and technology. In addition, Rachel volunteers in various roles for Astia, the California Clean Tech Open and Imagine H2O – a not-for-profit that is turning water problems into entrepreneurial opportunities.

Ms. Sheinbein holds a Chemical Engineering degree with a concentration in Environmental Engineering from the University of Pennsylvania. Rachel was also a sponsored fellow at the Massachusetts Institute of Technology (MIT) where she received an MBA and a Masters in Civil and Environmental Engineering, with a focus on operations and supply chain.

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Cole-Frieman Mallon & Hunt LLP provides legal services to the investment management industry. Bart Mallon runs the Hedge Fund Law Blog and can be reached directly at 415-868-5345.

More on JOBS Act for Hedge Fund Managers

Below is the transcript of an interview I gave to Markets Reform Wiki. The discussion below is about how the recently enacted JOBS Act will affect the hedge fund industry. There has been an overwhelming amount of attention paid to this bill because it will, in certain ways, fundamentally change the way some managers (especially small and emerging) market their hedge fund going forward. We have also published other pieces about this issue and there will likely be a lot of discussion about hedge fund marketing related to the JOBS Act in the future.

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Hedge Fund Marketing and the JOBS Act

Five Minutes with Bart Mallon, Cole-Frieman, Mallon & Hunt LLP

On April 5, 2012 President Obama signed into law the Jumpstart Our Business Startups Act (“JOBS Act”). Inserted into the Act were provisions on hedge fund marketing and accredited investor restrictions. John Lothian News Editor-at-Large Doug Ashburn spoke with Bart Mallon of Cole-Frieman, Mallon & Hunt LLP about the JOBS Act provisions, what they entail and how it will affect the hedge fund community.

Q: On April 5, 2012 President Obama signed into law the Jumpstart Our Business Startups Act (“JOBS Act”). Inserted into the Act were provisions on hedge fund marketing and accredited investor restrictions. What exactly do the provisions entail?

A: There is not actually any change in marketing provisions per se. What happened is the JOBS Act repealed earlier provisions in the securities laws which did not allow managers to have general solicitations with respect to their offerings. This essentially meant that managers could not solicit by advertising to the public through these private offerings and so managers really had to be careful when trying to grow the assets of their fund. One of the important things to note with respect to the provisions of the JOBS Act is that they can only market more freely if all of the investors of the fund are accredited investors. If they have non-accredited investors coming into the fund, then they cannot use these more liberal advertising means in order to solicit investors.

Q: Does this affect all types of fund structures?

A: For a 3(c)(1) fund structure, the accredited investor limit does not change. These managers are still limited to 99 individual investors. For 3(c)(7) funds, previously the limit was 499 investors. Now, that can be bumped up to 1999 investors. For 3(c)(7) funds, though, all investors must be qualified purchasers, which is actually a higher threshold than that of accredited investors.

Q: What do these marketing rules have to do with the JOBS Act, and why are they a part of it?

A: You have a couple things going on here. As people have been pointing out for a number of years, most of these securities laws were written in the 1930s, with the last one in 1940. The general nature of the industry has changed over the years; the JOBS Act is a reaction to some of the problems with these laws. Technological advances, and the ability of the internet to be a means of connecting with people in a way to market to potential investors – securities laws just do not address those issues. The JOBS Act was trying to find a way to balance investor protection of the securities laws with the ability for managers to go out and communicate and have a sort of certainty with respect to their activities on the internet.

Q: How will this change the way funds structure communication, such as on their web sites?

A: There is going to be a wide range of ways managers will be allowed to advertise. You will see more information available on their web sites and on hedge fund databases. You are also more likely to see hedge funds marketed in publications such as the Wall Street Journal or New York Times. There has also been talk that big fund complexes may have public advertising in sporting venues and such. I don’t know if it will come to that, but we are definitely going to see more fund managers trying to get out in front of the investing public and getting their name out there more. It will be interesting to see the avenues with which managers will use.

Q: Critics have suggested that this will be an invitation to some of the less scrupulous operators to come out of the woodwork to take advantage of the new rules. Do you see a problem with that?

A: Certainly, this is going to make the job of securities regulators much more difficult. Right now, with the restrictions, you don’t have a lot of managers out there touting performance and those sorts of things. Once you open up the floodgates and everyone starts doing it, it will be a lot harder for the SEC and for the state regulators to keep on top of what all these managers are showing. From a regulatory standpoint, in asking these agencies to enforce these securities laws and protect the investing public amid this deluge of advertising, I think becomes a tough task for the regulators. Savvy marketing people who might not have the best of intentions with respect to customer protections will have an easier time meeting population targets. That is one of the things Congress had to weigh when creating this law – investor protection versus capital formation and spurring the economy.

Q: The SEC has been given a timetable for the creation of a framework for these new rules. What do you expect to see in the SEC rulemaking?

A: I imagine we will see a lot of rulemaking on recordkeeping, and also on being able to back up any statements made in any advertising materials. It is clear that managers are going to need to make sure their investors are accredited investors, so I think there could be more of an onus on managers to do more fact-checking with respect to their investors.

But it really depends on how aggressive the SEC wants to be with respect to overseeing solicitations. The SEC is already an underfunded agency, so if they create more onerous rules for themselves to implement and oversee, they will be taking away from themselves internally. They have their own political balance they need to strike between promulgating rules that they can actually enforce, versus investor protection.

Bart Mallon is a partner and co-founder of Cole-Frieman Mallon & Hunt LLP, a San-Francisco-based law firm specializing in hedge fund and alternative investment legal services. His areas of specialization include setting up offshore hedge funds and separately managed structured accounts, and registration issues. Mallon is also the author of the Hedge Fund Law blog.

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Cole-Frieman Mallon & Hunt provide legal advice to hedge fund managers with respect to all aspects of their business including marketing under the new JOBS Act provisions. Bart Mallon can be reached directly at 415-868-5345.

JOBS Act Opportunities for Hedge Fund Managers

The JOBS Act has already sparked a number of interesting questions from hedge fund managers who want to begin more aggressive advertising campains under the new laws. We have generally been cautioning managers on starting any campaign until after the SEC has promulgated regulations. However, we do think that managers may want to start thinking about how they may implement a more robust marketing program as part of their overall capital raising plan. The article below, contributed by Meredith Jones and Joseph Pacello of Rothstein Kass, provides some insights into the opportunities available for fund managers post JOBS Act.

[HFLB Note: all links in the article below were not links in the original. The links in the article below are to other posts on this website and are not necessarily endorsed by the writers of the article.]

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JOBS Act Opens New Window of Opportunity for Hedge Fund Marketing

The Jumpstart Our Business Startups (JOBS) Act, signed into law by President Obama on April 5, offers hedge funds and other private investment vehicles more latitude for their marketing efforts. In this article, Meredith Jones and Joseph Pacello discuss some of the implications of the bill and issues that need to be on the agenda of savvy fund managers.

Since the launch of the first hedge funds in the 1940s, hedge funds have been subject to Securities and Exchange Commission (SEC) prohibitions on advertising and general solicitation. While “namebrand” funds with widespread name recognition and extensive investor relationships have generally not been impacted by these restrictions, the inability to solicit capital from accredited investors who were not previously known significantly curtailed the marketing and capital raising efforts of smaller funds. Over the last three years, in the wake of the global economic contraction of 2008, managers with less than $1 billion particularly chafed under these restrictions, as they chased scarce investors, often with fewer resources.

The JOBS Act potentially removes those prohibitions, pending formal rulemaking by the SEC, who will have final say on how the JOBS Act is implemented. Under the new rules, the SEC would eliminate the prohibition on general solicitation as it relates to hedge funds, provided that the only purchasers are accredited investors. As a result, accredited investors will no longer have to be previously known to the fund. In addition, the Act theoretically removes the prohibition on general advertising, giving funds greater opportunity to and options for communication with potential investors.

While managers with more than $1 billion under management appear to be taking the rule change in stride, for funds with less than $1 billion under management, this new freedom to communicate with investors presents a wealth of potential new capital raising avenues. Fully leveraging this opportunity, however, will require funds to become more sophisticated and strategic in their marketing efforts. Those that fail to do so risk being alsorans in what is sure to be a more competitive period ahead.

Frankly, the previous regulations made “hedge fund marketing” almost a contradiction in terms. Much of the capital raising success of a fund was predicated on the fund’s existing relationships, or their ability to develop new contacts through limited resources, such as hedge fund databases, conferences and networking events. While relationships—not to mention performance—will always be important, the JOBS Act should result in a greater emphasis on marketing strategy and execution in the capital-raising process.

The fact that all funds will be able to solicit all accredited investors means that more investors will be hearing from more funds. The increased volume of conversations means that funds will have to “rise above the noise” to succeed in capital raising. Firms that plan and communicate effectively will therefore have a strategic advantage over those who do not.

The implementation of changes to the existing solicitation and advertising restrictions will not occur before early July, the deadline by which the SEC must complete rulemaking for this section of the JOBS Act. To be clear, we have yet to see how the SEC will interpret this change. For example, fund-sponsored mailings or events could be permitted, but not without extensive records of investor qualification documents being collected in advance. Press releases could be more common, but there could be limitations on what can be discussed. As a result, in this interim period it is probably wise not to be overly aggressive with new marketing avenues or advertisements. However, this doesn’t mean that funds should sit back and wait for the SEC’s final rule to begin preparations.

Because the capital raising environment was already becoming more competitive, particularly at the smaller and emerging ends of the alternative investment spectrum, funds should use the next 90 days to carefully review the quality of their marketing materials. In particular, funds should examine their marketing through the eyes of a potential investor and ask:

Does the fund know its competition and can it differentiate itself with a clearly defined value proposition? This is particularly important if the fund operates in a highly saturated area, such as long-short equity, macro, futures trading and private equity.

Are the fund’s marketing materials clear and concise? It is a common mistake to assume length equals conviction. Indeed, most investors offer approximately one hour for an initial meeting and length can spell repetition of some facts, while having to omit others due to time constraints. A clearly defined value proposition often takes fewer words, not more.

Is there a well defined “story?” Although tempting, particularly for funds where the manager pulls double-duty as a marketer, it is not always advisable to assume the strategy and opportunity speaks for itself. It is vital that the documents and pitch communicate not just what you do, but who you are as a manager and a firm, including how you view risk and run a business.

Do the marketing materials have a sophisticated look and feel? While the content of the materials does the heavy lifting, their look and feel set the tone. Does your firm appear to be institutional? Are the slides dense or wellpaced? Do you have a consistent brand? Aim for crisp and clean layouts that help the reader through the material.

How strong is the fund’s marketing capability? Few hedge funds have the luxury of a full-time dedicated marketing (as opposed to fund-raising) professional on staff. Firms should consider bringing in an experienced outside consultant who can make high-value, targeted improvements.

In this evaluation process, it is also important to recognize that things like pitch books are more than mere props—they structure the conversation a fund has with its potential investors. A poor pitch book means that important points are likely to be skipped over (or blunted from repetition); a good pitch book amplifies the effectiveness of the presenters.

When revising communications materials, remember that anti-fraud regulations remain in place; a fund needs to be scrupulous in its representations and consistent in its themes. For some in the marketing world, “gilding the lily” is a common practice, however in the investment arena, it is one to be avoided. Explanatory notes, review by the firm’s legal counsel and truth in advertising will still be required under the new rules. Also note that as more materials are generated and sent to a wider audience, the ability to track communication will become more important as well. If the SEC audits your firm post JOBS Act, you will need to be able to present full documentation of your marketing efforts.

Regardless of the final interpretation of the JOBS Act by the SEC, funds also need to develop a marketing plan to guide their outreach to potential investors. Again, the competition for assets has gotten more, not less, fierce over the last three years. Putting a strategic marketing plan in place will curtail the impulse to cast the widest possible net and pursue every available audience. Because most funds have limited marketing resources, it is essential to allocate those resources strategically. This requires looking at three factors:

1. Capacity: Marketing efforts need to be scaled to how much capital needs to be raised. A stellar marketing campaign that results in turning away a significant number of investors represents wasted resources. A fund that is making steady progress toward being fully subscribed may in fact be able to meet its goals by continuing its current network-based outreach.

2. Manpower: Pursuing investors takes time, and for many firms, that means time away from other tasks, including investment management. Funds need to determine, given their capacity, which audiences are most likely to result in the largest return on their marketing investment and prioritize accordingly.

3. Money: A firm’s marketing spend needs to be allocated so that it is directed toward strategically valuable efforts and does not cannibalize other functions.

Certainly, the potential benefit of the JOBS Act is that funds, particularly those with less than $1 billion under management, will be able to leverage their capital raising efforts. Blogs, websites, email campaigns, advertisements, press releases and other marketing activities may allow funds to extend their reach, effectively providing a type of “air cover” for their one-on-one capital raising efforts. However, any decisions to engage in these activities should be evaluated in light of the restrictions above.

In conjunction with a review of marketing, funds should also examine their investor relations bandwidth. For 3(c)7 funds directed toward qualified purchasers, the JOBS Act raises the maximum number of holders of record from 499 to 1,999. This means that funds that are near their investor maximum could potentially make the decision to allow more investors (capacity of the strategy permitting), or consolidate existing 3(c)7 funds. It is unlikely that these changes will have a tremendous impact on all but the largest fund complexes at the present time. However, if a manager does decide to increase his investor headcount, then effective and proactive investor relations will undoubtedly become a greater concern, which we will address in a future article.

Rothstein Kass will be monitoring the SEC rulemaking in connection with the JOBS Act and its impact on private funds.

By Meredith Jones, Director and Joseph A. Pacello, CPA, JD, Principal

For more information on this article and for services offered by Rothstein Kass, please contact Meredith Jones, Director at 972.581.7066 or via e-mail at [email protected]

Meredith Jones, Director

Meredith Jones is a director at Rothstein Kass responsible for generating research and content on the alternative investment industry by and on behalf of the firm. She also provides business advisory services to the firm’s clients. Meredith has more than 14 years of experience in the alternative investment industry, with extensive expertise in research, writing, consulting, marketing, business development, due diligence, index construction and asset allocation. Her research has been published in a number of books and journals and in the international press.

Prior to joining Rothstein Kass, Meredith was a director in the Barclays Capital Inc. Strategic Consulting Group, where she was responsible for producing thought leadership content on a variety of manager and investor focused topics, as well as leading consulting projects for BarCap clients. She previously served as a managing director at PerTrac Financial Solutions (PFS), a leading provider of investment analytics. At PFS, Meredith was responsible for research, marketing, investment data, and was a fixture on the international hedge fund conference circuit.

Meredith began her career in alternative investments at Van Hedge Fund Advisors International in 1998, where she became the senior vice president and director of research. Meredith led the team responsible for hedge fund due diligence, manager selection, portfolio construction, hedge fund data, index creation and industry research while at VAN.

Over the past 14 years, Meredith has presented her original research and insights to industry participants around the world and has had her findings published in books, journals, industry publications and major media outlets, including The Economist, The Wall Street Journal, The Journal of Investing, Alternative Investment Quarterly and the Financial Times.

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Cole-Frieman Mallon & Hunt LLP is a law firm to the investment management industry and runs the Hedge Fund Law Blog. Bart Mallon can be reached directly at 415-868-5345.

JOBS Act Signed Into Law

Allows Hedge Funds to Openly Solicit Investors

President Obama has signed into law the Jumpstart Our Business Startups Act (“JOBS Act”), a law which eases some of the private investment fund industry’s long-standing regulatory burdens.

There are two parts of the JOBS Act which in particular stand out for the hedge fund industry: (1) private investment fund managers including hedge fund managers may now make general solicitations and advertise their fund in order to attract investors, as long as the funds only have accredited investors; and (2) private funds and hedge funds may now have up to 1,999 accredited investors, or 500 non-accredited investors, without having to register with the SEC under the 1934 Act. [For background information on this issue, please see section “500 or Fewer Investors” on our post about Section 3(c)(7) hedge funds.]

During the next 90 days the SEC will be promulgating regulations with respect to the changes in the securities laws.

Ban Lifted on General Solicitation and Advertising

Previously Rule 506 of Regulation D prevented private fundsfrom advertising publicly or soliciting the public for investment. This rule raised the specter of liability in numerous contexts. For example, private fund managers and employees could face serious consequences – including risking the fund’s SEC filing exemption (different from IA registration exemption) – for discussing their investment strategy with certain potential clients, or for putting their contact information on a fund’s publicly-accessible website. The JOBS Act changes this statutory scheme, allowing private funds to advertise publicly and to solicit the public for investment. It is not yet clear precisely what forms of advertising and solicitation will be permitted under the new rule. The SEC still has 90 days from the date of the signing of the JOBS Act to issue final regulations which will likely include more details on allowable advertisements and solicitation.

Increased Number of Accredited Investors

Prior to the JOBS Act, the Securities Exchange Act of 1934 required private funds to register with the SEC if they had more than 499 accredited investors (see 3(c)(7) link above). Under the new law, a private fund may have as many as 1,999 accredited investors without triggering that registration requirement. Increasing the number of permitted investors may allow private funds to raise more capital. [Note: the new law also creates a new source of financing called “crowdfunding.” A detailed analysis of this topic is beyond the scope of this blog post, but it should be noted that purchasers in a crowdfunding are not counted toward the 1,999 investor limit. Also not counted are employees who receive securities from a fund pursuant to an executive compensation plan.]

Other Items

The new rules do not apply to commodity pools which are subject to other regulatory oversight from the CFTC because of the Commodities Exchange Act. In general many commodity pool operators are going through the CFTC CPO registration process because of separate CFTC rulemaking which we detailed in a previous post.

Conclusion

While many groups including hedge fund managers are applauding this shift in the law, the SEC is likely to craft regulations which seek to limit the full extent of the potential general solicitations. Fund managers should remember that while general solicitations may be allowable in the future, managers may still be subject to other regulations under the Investment Advisers Act, especially after the Dodd-Frank requirement for hedge funds to register with the SEC. Specifically, fund managers who are SEC registered IAs cannot use testimonials and there are a number of requirements for hedge fund performance reporting which will need to be followed. While it is clear that private fund managers will have more flexibility with respect

to advertising than before the JOBS Act was passed, managers will need to be vigilant with their compliance programs if they decide to adopt more agressive public advertising campaigns.

Many more updates on this topic are expected.

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Cole-Frieman Mallon & Hunt LLP provides regulatory and legal services to the investment management community. Bart Mallon’s practice focuses on both hedge fund manages as well as the managed futures industry. Please contact us or you can reach Bart Mallon directly at 415-868-5345.