The End of the General Solicitation and Advertising Prohibition for Private Funds?

Earlier this month, the Managed Fund Association (“MFA”), the largest lobbyist for the alternative investment industry, petitioned the SEC to amend Rule 502(c) of Regulation D to eliminate the prohibition on general solicitation or general advertising with respect to private funds. This longstanding prohibition prevents private funds that are exempt from registration under the safe harbor of Reg D from engaging in “general solicitation” and “general advertising.” The ban, set forth in Rule 502(c), prohibits issuers from offering or selling “securities by any form of general solicitation or general advertising, including, but not limited to…Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio…”

The MFA asserts that technological changes, and Rule 502(c)’s innate vagueness, make compliance with the prohibition both unnecessarily risky for private funds and extremely costly to funds and the economy as a whole. Fund managers “expend considerable time and resources when making any sort of communications or participating in industry events, and often…refrain from such activity” entirely to avoid the risk of losing the protection of Reg D. This over-cautious stance results in a “lack of publically available, verified information about hedge funds,” which in turn has created the perception that “the industry [is] secretive,” likely “discourage[ing] institutional investors from allocating capital to private funds.”  The MFA argues that lifting the prohibition will lead to a change in this misperception about the industry and allow potential investors to “gather information about private funds at relatively low costs and lead to the more efficient allocation of capital.” MFA – and other supporters of this reform – assert that increased investment in such funds will fuel the economy since many hedge funds are exposed to risks that traditional retail investors commonly avoid.

The MFA’s petition is not the first call for the rollback of the advertising and solicitation ban for private funds. The Senate and the House both introduced legislation that would mandate similar changes to Reg D. Indeed, as noted in the MFA’s petition, the SEC itself has questioned the necessity of the ban with respect to the exemption under Section 3(c)(7) of the Investment Company Act , which only allows sales to “qualified purchasers” – defined as individuals with at least $5 million in investments and institutions with at least $25 million in investments . Only time will tell whether the SEC or Congress will implement reform, but the voices in favor of a change seem to be getting louder.

If you have any question about compliance with Reg D, or any other compliance concern, please post your comments here or contact the author at sarah.weber@jackolg.com.

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