Court rules on fund ‘solicitation’

A Massachusetts’s court ruling on hedge fund group Bulldog Investors could have implications for private equity GPs.

A recent Massachusetts court ruling could have repercussions for the way US private equity firms communicate with prospective investors. Last week the Massachusetts Supreme Judicial Court ruled that New Jersey-based hedge fund manager Bulldog Investors offered unregistered securities to unqualified investors in violation of the state’s Uniform Securities Act.

The act prohibits the offering or selling of unregistered securities in Massachusetts unless the securities meet exemption criteria or are “federally covered” securities, such as most publicly-traded stocks which instead fall under federal security law. 

Originating from a complaint filed against Bulldog in 2007, Secretary of the Commonwealth William Galvin alleged the hedge fund group solicited investors through its website and emails, which offered both accredited and non-accredited parties alike full access to Bulldog’s marketing materials.

Bulldog argued its web site and email did not constitute an ‘’offer’’ within the meaning of the act as one could not purchase securities merely by responding to an email.

The court, in agreement with the secretary, ruled the definition of “offer” would include the “solicitation of an offer”. Thus, an email from Bulldog to a Massachusetts investor which included the fund’s performance history, investment strategy and other details, constituted placing an offer.

Bulldog had argued that its relationship with Massachusetts was insufficient to allow the state personal jurisdiction over it. The court decided, however, that any contact with a Massachusetts resident – Bulldog emails had reached Massachusetts-resident Brendan Hickey – resulted in the hedge fund ‘’purposefully availing themselves of the privilege of conducting business activities in Massachusetts and invoked the protection of Massachusetts law.’’

“In this case, the court found that because the plaintiffs operated a website accessible in Massachusetts and sent a solicitation that is prohibited by Massachusetts law to a resident, it was reasonable for the plaintiffs to anticipate being held responsible in Massachusetts,” securities attorney Dan Rabinovitz, of Boston-based Michaels, Ward and Rabinovitz, told PEO in an interview.

Fund managers may also take pause with the court’s opinion that Bulldog’s website disclaimer, stating any information contained therein did not constitute a solicitation, did not remove liability.

The court ruled a disclaimer is only one factor in determining whether Bulldog’s actions were an offer.  The materials sent in email were designed to “stimulate interest in purchasing Bulldog's securities” and “most importantly the email message[s] sent…and the attachments therein did not contain the disclaimer that was posted on the website,” the court ruled.

“What this means is that if one offers unregistered securities for sale, using any method, you cannot by way of a disclaimer or a release or any other self serving document, change the fact that the securities have in fact been offered for sale,” Rabinovitz added.