12 Jul Details of New Regulation D Rules Part II: Private Investment Funds Safe

This is a little technical but will be important if it applies to you. In the new rules passed ending the ban on general solicitation and advertising in Regulation D Rule 506 private securities offerings, the SEC specifically discussed their impact on private equity, hedge and venture capital funds. When the funds raise money, they often use Rule 506 to ensure the offering is not treating as a public offering. But to stay private and unregulated they also have to be exempt from being treated as “investment companies” such as public mutual funds.

A concern was raised in the original rule proposal that allowing general solicitation in seeking to raise money for a fund might trip the exclusion from being an investment company because that exclusion depends on a prohibition on such solicitation. However, the SEC looked at the language of the Jumpstart our Business Startups (JOBS) Act which mandated the new Regulation D rules, and determined that a fund can indeed do advertising and general solicitation to raise money under the new rules and still maintain their exemption from investment company status.

Some commenting on the original proposal suggested various restrictions on funds that do this, setting advertising standards similar to mutual funds. The Commission brushed aside these suggestions other than to say they will monitor the advertising practices of the fund industry when it develops to see if further action is necessary.