SEC Enforcement Division’s Asset Management Unit’s Chief Anticipates Increase in Private Equity Enforcement

Bruce Karpati, the Chief of the SEC Enforcement Division’s Asset Management Unit, held a Q&A session entitled “Private Equity Enforcement Concerns” at the Private Equity International Conference held in New York on January 23, 2013. He addressed private equity firm activities of concern, how the SEC is tracking those activities, and ways firms can avoid getting into trouble. [Read more...]

SEC Enforcement Division’s Asset Management Unit Chief Reveals New Priorities in Regulation of Private Funds

Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit, gave a speech entitled “Enforcement Priorities in the Alternative Space” on December 18, 2012. The recently established 75-member Asset Management Unit (AMU) is dedicated to investigating investment advisers, investment companies, hedge funds, mutual funds, and private equity funds making up the “alternative space” referred to in the speech’s title. Karpati addressed current enforcement priorities, touching upon, among other topics, the AMU’s enhanced expertise, investor risks, and how the hedge fund operating model incentivizes misconduct. As outlined in Karpati’s speech, the AMU’s current priorities indicate that, while traditionally hedge funds and private equity funds were lightly regulated, this will likely no longer be the case. [Read more...]

The SEC (Finally) Issues a Preliminary Rule for Repeal of the Regulation D General Solicitation Requirements

Yesterday, the SEC finally released its proposed rule to amend Rule 506 of Regulation D to eliminate the general solicitation prohibition for private placement offerings. As I’ve discussed in a previous post, the SEC’s continued delays in issuing this rule has resulted in considerable frustration among the entrepreneurial community and in Congress.

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The SEC Increases the Net Worth Requirement of the Definition of “Qualified Client” Impacting Both Registered and Some Unregistered Private Fund Managers

Private fund managers who are registered with the SEC are required to follow federal regulations on performance compensation.  Generally, if a registered fund manager desires to collect fees based on fund performance (such at the typical 20% carried interest), then each investor in the fund must be a “qualified client.”  Prior to the passage of the Dodd-Frank Act, a qualified client was defined as either (i) an individual or company that immediately after investing into the fund has at least $ 750,000 under the management of the fund manager or (ii) an individual or company that has a new worth of $1.5 Million or more or qualifies as a “qualified purchaser.”[1]  The Dodd-Frank Act required that the SEC update these two thresholds for inflation, which it did, effective September 19, 2011.  It updated the thresholds to $1 Million and $2 Million respectively. [Read more...]

Should private funds be exempt from the ban on general solicitation?

The Managed Funds Association recently submitted a comment letter to the Securities and Exchange Commission dated January 6, 2012 requesting the SEC to amend Rule 502(c) of Regulation D to exempt private funds, such as hedge funds, private equity funds, and venture capital funds, from the ban on general solicitation and advertising under Regulation D.

Currently under existing law, private funds cannot engage in any “general solicitation” or “general advertising” in connection with offers and sales of interests in their funds.  This prohibits funds from engaging in any public advertising and communications about their securities offerings and requires a “substantial pre-existing relationship” between the issuer and any offeree.  In its letter, the MFA makes the case that changes in the securities markets and technology have rendered the general solicitation restrictions of Regulation D, enacted 30 years ago, outdated.  In addition, the MFA argues that the vagueness over what constitutes a general solicitation, combined with the severe penalties for even an inadvertent violation creates legal uncertainly for private funds, which inhibits capital formation.  It also makes the argument that allowing general solicitations for private fund offerings will increase transparency of funds, because they will be able to publicly publish their returns. [Read more...]