Chicago partner David Matteson and associate Andrew Raby published an article in Futures titled, “Now That Hedge Funds Can Advertise, What Are Commodity Pools – Chopped Liver?” The article discusses the new advertising rule and whether commodity pool operators can take advantage of the changes.
In July 2013, the SEC adopted final rules required by the Jumpstart Our Business Startups Act (the JOBS Act) to eliminate the ban on general solicitations and advertising by private offerings under Rule 506 of Reg D.
For decades, the SEC rules exempted “private offerings” from the registration requirement and CPOs and private fund managers have relied on these exemptions to sell their funds. General solicitations, including advertising, were not allowed and restricted the ability of CPOs and private fund managers to discuss their funds in the press or any widely distributed forum – including the manager’s website and websites of third parties.
The new SEC Rule 506(c) lifts the advertising ban for CPOs and private fund managers willing to comply with its terms. Those who do not want to publicly advertise will continue to comply with the “old” Reg D and will not be subject to the new provisions.
Rule 506(c) requires that all investors in the offering must be accredited investors; and the fund manager must take reasonable steps to verify that the investors are accredited.
The new rule also adopts a principles-based “facts and circumstances” approach to determine whether reasonable steps were taken to verify that the purchasers are accredited. Four “safe harbor” methods for determining that a natural person is accredited have also been added.
Currently, CFTC rules still restrict many CPOs from advertising certain pools. Commodity pools fall into either a “filed” or “exempt” category. Filed pools will be able to take advantage of new Rule 506(c). However, most exempt pools claim exemptive relief under Rule 4.7 or Rule 4.13(a)(3), which have advertising restrictions. The CFTC has been petitioned to align their rules with the new SEC Rule 506(c).