New Private Fundraising Rules Attract Meager Interest

Fordham Corporate Law Center in The Wall Street Journal, March 24, 2014

U.S. securities regulators lifted restrictions on advertising of private securities sales in September, but only a small percentage of companies have taken them up on it.

The lag may stem from the complex web of additional securities laws. In addition, there is no standard for reporting performance figures of private funds, and there could be more changes on the horizon.

“There’s a lot out there that hasn’t yet been decided,” Andrew Donohue, deputy general counsel at Goldman Sachs Asset Management said at a Fordham Law School symposium on Monday in New York. He said companies lack a template for how to navigate the new rules and other securities laws.

Until last year, companies had been restricted since the 1930s from advertising or generally soliciting the public to raise private capital to launch a hedge fund or startup. The Securities and Exchange Commission had to scratch that rule after the 2012 Jumpstart Our Business Startups Act. Now, companies can advertise private offerings as long as they ensure they only sell securities to sophisticated investors.

But companies have been reluctant to take advantage. Since September, only one in 10 companies, excluding investment funds, has said they would reach out to private investors using the general solicitation exemption, according to Fortune.

A handful of firms have created ad campaigns, others are using telephone marketing or sending emails to potential clients, said James Jalil, a corporate and securities partner at law firm Thompson Hine LLP.

Hedge funds are generally the biggest users of the $1 trillion private offerings market. Yet many of them are still wary because any hedge fund that trades commodities is still hobbled by general solicitation rules of the Commodity Futures Trading Commission. Some are also unsure that reporting performance information in ad materials won’t violate other securities laws.

“The SEC has indicated hedge funds who do this are going to get special attention, and I think even if you’re following all the right rules, special attention might be something that interferes with your day-to-day operations,” said Mitch Ackles, president of the Hedge Fund Association.

The SEC also may still make changes to the general solicitation rules. The SEC has proposed additional fraud protections for investors, such as filing advertising materials in advance for regulatory review. But those proposals are controversial.“Congress’ intent was very clear,” Rep. Patrick McHenry (R., N.C.) said at the Fordham event. “We were supposed to make the regulation less onerous, not more.”