News Analysis: Messing with Reg D

A new transparency initiative from Texas Teachers puts a spotlight on the US’ anachronistic ban on ‘general solicitation’, writes David Snow.

Want to have some fun? Pick up the phone, call your fund formation lawyer and ask this question: “We’re in fundraising mode so isn't it great that our strategy and track record are going to be discussed on TV?”

Then call an ambulance, because your legal counsel will have just had a heart attack.

Between gasps, your lawyer will remind you that according to US securities laws, “generally soliciting” investors for a private investment fund is prohibited. And yet that’s exactly what the future could hold if the latest push for webcasting board meetings at US public pensions gathers momentum.

First, some background. The language governing the non-solicitation rule, generally referred to as “Regulation D”, reads as follows: The issuer of an unregistered security, such as a private equity partnership interest, shall not “sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following: (1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and (2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising”.

Fast forward to the present day – how does the SEC feel about a streaming video made available to the entire world that captures a board-level conversation about a private fund opportunity? 

David Snow

We refer here to the Teachers’ Retirement System of Texas, a major backer of private equity funds, which has just launched a programme whereby it will begin webcasting its full board meetings. The pension’s sub-committees, including its investment management committee, are not included in the pilot, however the move by Texas raises the question of just how long it will be before other LPs start putting GP road show presentations on the small screen. Some pensions already videotape or audiotape GP pitches and make them available to anyone who asks. Several notable US pensions already broadcast (in various formats) their board and committee meetings, including the California State Teachers’ Retirement System and its neighbour, the California Public Employees’ Retirement System.

The webcasting and other related initiatives are part of a broader trend among public institutions to be as transparent as possible on how they make investment decisions. But these transparency policies create an interesting conflict with SEC rules banning GPs from publicly broadcasting information about their fund offerings. 

It could be argued that a GP deliberately broadcasting fundraising information is different from one that has had its materials disclosed by a prospective investor. But the outcome is the same – unqualified and unaccredited investors end up being exposed to fundraising materials. 

And to this we say … so what.

GPs should be allowed to generally advertise their fundraising opportunities and to take advantage of the many new forms of communications technology to find capital. Remember that GPs will still be held to anti-fraud rules as well as rules prohibiting them from accepting capital from unaccredited investors. 

The Texas Teachers policy exposes Regulation D as outmoded and unfair, especially in a regulatory environment that is making it increasingly expensive and cumbersome to operate a private equity firm. How about throwing this industry a bone and reforming Reg D?