Since President Obama signed the Jumpstart Our Business Start-ups Act into law in April 2012, we here at PERE have been waiting for the day that the US Securities and Exchange Commission (SEC) implements the provision of that law eliminating the prohibition on general solicitation for private offerings. After all, it means that fund managers no longer would be able to use regulatory repercussions as an excuse for not speaking to us about their fundraising activities.
After a multitude of delays, that day finally arrived this week, with the SEC voting to adopt a previously proposed rule lifting the ban for many types of private investment funds, including real estate. Indeed, the new rule substantially increases the scope of permitted activities during fundraising, allowing fund managers to engage in all forms of communication with prospective investors. In particular, it is likely to facilitate the use of the Internet and the press (Hooray!) as means to communicate information about fund offerings. Even for those managers that do not intend to conduct a general solicitation, the rule may serve as a ‘safety net’ against accidental disclosures of offerings otherwise intended to comply with existing rules.
Of course, just because the ban on general solicitation has been lifted doesn’t mean that every firm will rush to abandon the status quo. But the new rule will likely benefit those firms that are struggling with their fundraising, managers that are looking to expand their investor pool and newer emerging firms. Perhaps less so large, established firms with many existing (and healthy) LP relationships – at least not soon.
Nevertheless, it does create a couple of new hurdles for firms to clear in order to participate, and some may believe that the benefits do not outweigh the costs.
For those firms that do elect to take advantage, the requirements might be deemed burdensome. To benefit, all investors admitted to a fund must qualify as ‘accredited’ investors and the manager must take reasonable steps to verify the accredited status of each investor. The new rule will offer a list of sufficient verification methods but, unlike under prior rules, self-verification by the investor is not among them.
Some legal experts have identified this requirement as one potential hindrance to widespread implementation. However, for firms whose target investors are primarily institutions, verification is likely to be nothing more complex than filing out a form once. For those targeting high-net-worth individuals, the process could be a little more involved, although one lawyer noted that he has heard a variety of third-party providers already express interest in providing verification services.
Another potential hindrance could be the filing requirements. Under proposed compliance rules, those firms that wish to participate under the new rule would need to make a pre-offering filing of their marketing materials, as well as file again within 30 days of final closing. While one legal expert thought this could be a deal-breaker, another did not see it as problematic since many firms make numerous Form D filings already.
Meanwhile, state regulators are less than happy about the new rule because they believe it will result in more fraud. Although the SEC voted to adopt rules that prohibit private offerings by ‘bad actors’, as well as proposed a variety of other rules to limit abuse under the new rule, state entities may look for additional ways to make general solicitation tougher. Furthermore, if a firm is fundraising outside the US, it will need to analyze the implications of the new rule in those markets as well, as solicitation and disclosure policies vary widely from country to country.
Still, the trade-off is the ability to communicate more freely and access many more investors more easily, potentially with less expense. As one legal expert put it, “Anyone is going to conclude that, if you need to build your investor list, the trade-off is worth it.”
Although it may take a while for some firms to warm to the change, it is likely that even larger firms will seek to take advantage over time. After all, defined benefit plans are on the decline worldwide and could be a rare beast within the next 15 to 20 years. Those firms that are thinking long term already are looking to where the next generation of investor is coming from, and the new regime could just be the key to the future.