More sound and fury

Private equity fundraising in the United States has generally happened behind closed doors. But that could change now US President Barack Obama has signed the Jumpstart Our Business Startups Act, which passed into law on 5 April.

The bill, which is intended to ease bureaucratic restrictions for companies seeking access to public or private capital, makes some significant changes to fundraising regulations. Notably, firms hitting the market will be able to distribute general solicitations and advertisements for their investment vehicles.

“What that means, is that, as long as an issuer – private equity or other – is willing to accept potential disclosure liability, they can broadly offer their securities for sale,” Matthew Kaplan, a securities partner at Debevoise & Plimpton, tells Private Equity International. So in theory, firms will be able to communicate via everything from email blasts to Twitter campaigns to newspaper ads.

This is good news for all the first time funds and spinouts hitting the market, says Eric Zoller of placement agent Six Point Partners. “Eliminating the restrictions on general solicitation would remove much of the uncertainty surrounding information released by a fund manager in a press release, or on its website, that could in turn negatively impact fundraising,” Zoller says. “My overall feeling is that it will help GPs raise brand awareness, particularly for [funds] that are under the radar.”

In addition, easing the regulations could help new firms to raise their profile without risking legal trouble. One lawyer suggested that the new rules would mitigate the costs firms currently incur to prevent prohibited communications – or “foot faults” – from leaking out.

However, before firms start blasting their fund terms to the Twittersphere, caveats remain.

While US regulatory bodies may be toning down restrictions on general solicitations, other rules governing communications remain firmly entrenched. The Dodd-Frank financial reform bill requires private equity firms with $150 million or more in assets under management to register with the SEC as financial advisors. This designation carries its own strict requirements with regard to advertising and marketing: it prohibits references to past recommendations or testimonials, as well as any indication of performance or provided service that may be considered untrue.

With the SEC honing in on firms’ stated performance, advertising as financial advisers may not be the wisest path for first time funds, whose track records can be easily disputed.

What’s more, general solicitation of investors casts a wider net for limited partners – which in turn presents a host of new complications for firms on the fundraising trail. As one source says, “you don’t want every Tom, Dick and Harry coming into your office looking for access” to a fund – particularly because funds are still limited to accredited investors, and the JOBS Act clearly states that the onus is on the firm to ensure the veracity of their limited partners.
No wonder, then, that many market sources indicate that they don’t expect fundraising strategies to alter substantially under the new regime. “A lot of [fund managers] have been cautious, at least to the extent they’ve discussed it,” says Tom Friedmann of law firm Dechert.