For more than a year now, the Jumpstart Our Business Startups Act of 2012 has been hailed in the media as a game changer for hedge fund capital introduction. Some have even asked whether we should expect to see billboard ads or sponsored sporting events in the not-too-distant future.
In July, as mandated by the JOBS Act, the Securities and Exchange Commission adopted the much-anticipated amendments to its rules, lifting the 80-plus-year ban on general solicitation and advertising. This led some to believe that once the rules were fully enacted, we would see an instant increase in hedge fund advertising.
To the contrary, the amended rules went live Sept. 23 and were met with the sound of crickets. The reality is that for most firms, it will be business as usual for some time.
Why are firms not taking full advantage of these new relaxed rules?
One reason is that it draws unwanted attention from regulators. The hedge fund industry is notoriously private, and for good reason. Established firms are well-aware that the SEC pays attention to firms in the media, and many examinations are sparked by newspaper articles and other news reports. Further, the SEC has proposed that advisers be required to notify the SEC at least 15 days prior to the first use of general solicitation and that solicitation materials be passed to the SEC. These added disclosure requirements could make firms more susceptible to SEC inquiries. The SEC has stated that examinations will focus specifically on compliance by firms using general solicitation.
Other rule violations
Another reason is that it potentially causes the firm to violate other rules and regulations. For example, while the SEC has lifted the ban on general solicitation, the Commodity Futures Trading Commission has not. Firms trading a minimal level of derivatives transactions are exempt from registering with the CFTC, but the exemption is conditioned on firms not marketing their product. Until the CFTC harmonizes its regulations with the JOBS Act, legal counselors are advising firms to sit tight on any marketing endeavors.
It's not just U.S. regulations that firms must pay attention to but regulations around the world, as well. We now live in a world where no regulation exists in a vacuum. With today's online media and electronic communications, actions are global, and firms run the risk that activities permissible in one jurisdiction are prohibited in another.
Marketing activities could cause a firm to be in breach of the Alternative Investment Fund Managers Directive, which governs marketing to European Union in-vestors. Under the AIFMD, EU member states may allow non-EU firms to market in their particular territory as long as certain reporting requirements are met. But what is considered “marketing” differs by EU member state, leaving firms nervous about whether certain marketing activities, such as publishing marketing materials on their websites, could be viewed by some member states as solicitation of EU investors.
Aside from legal and compliance reasons, hedge funds are likely reluctant to advertise because it's simply not necessary. Established firms seek institutional investors, and general advertising will not necessarily attract such investors.
For smaller funds, it may be a different story. Lifting the ban on general solicitation provides firms with more opportunities to reach in-vestors. While it is highly unlikely that we will see funds advertising on television anytime soon, we may see some firms pursuing solicitation opportunities with more-creative and niche-based channels, such as industry trade and business publications.
Regardless of whether a firm launches a marketing campaign, one seemingly positive aspect of the amended rules is that hedge funds can now breathe a little easier when speaking to potential investors and to the media — though it might be a while before we see an industry shift toward advertising.
Jeanette Turner is managing director and general counsel at Advise Technologies LLC.