Bull marketing

We are getting very close to seeing hedge fund advertising become a reality. The SEC has been mandated to come out with the regulation by Oct 31, 2013 at the latest. As a result of there being so much content written on the subject, I will continue to post interesting pieces here. Please feel free to reach out to me with any questions or comments on hedge fund advertising. This is a subject I am intimately familiar with and while my firm HedgeCo owns The Hedge Fund Ad Network, we have also launched a joint venture with Financial Services focused PR giant, Cognito Media to provide funds with efficient and optimized campaigns to suit their firm needs. If you are a fund that is looking to advertise in print, television, online or other offline mediums, please feel free to reach out to me directly. Enjoy the articles!

The Economist - TOBACCO and alcohol brands face heavy restrictions when it comes to advertising. Hedge funds and other purveyors of alternative investments have suffered similar prohibitions on marketing their products. That ban may soon be lifted in America. (Europe’s pending new regime for alternative investments is stricter, although it has lots of loopholes.) Long consigned to silence, the money men are starting to practice their sales pitches.

Change is expected as part of the JOBS act, a 2012 bill designed to make it easier for smaller American businesses to raise cash. Hedge funds, private-equity firms and others piggybacked on the reforms in the hope of widening the pool of investors they can pitch to. The Securities and Exchange Commission (SEC) is busy writing the rules that would put the bill into practice. That process has been bedeviled by delays but it seems inevitable it will overturn a Depression-era ban on “general solicitation”.

Read the whole story here

SALT 2013 - Another great Hedge Fund Conference


SALT is Skybridge’s annual hedge fund conference held in Las Vegas each year. This May marked my fourth SALT conference. Now 2 weeks after it ended I've finally caught up with all my emails, and it’s time to digest and relay the experience on to my readers.

The SALT Experience

Stepping off the plane, it becomes obvious that SALT is a different experience than other conferences that the average hedge fund manager or investor will go to this year. The difference is the passion that organizer Anthony Scaramucci has put into not just running a  hedge fund conference, but running THE hedge fund conference.

In the last 5 years since the SALT conference started, nobody can argue against the impact that it has had on the industry. This is mirrored by Market Watch who announced that “A guy named ‘The Mooch’ is becoming the face of the hedgefund industry.”

This 4-day event is truly one of a kind, and the experience is a must for any hedge fund, investor (institutional or otherwise), or firm that services the hedge fund industry.

The People


SALT is all about access, the type of unique access that you get, summed up nicely by Charles Gasparino’s tweet ”One of the best things about going undercover at #salt2013 is that I can break stories hours before CNBC.”

With industry leaders roaming the halls of the Bellagio, world leaders such as George Papandreou, Ehud Barack, and Nicolas Sarkozy doing one-on-one discussions, and visionaries and futurists such as Michio Kaku speaking at lunches, being at SALT is a truly unique experience in the hedge fund industry.

There were so many speakers that literally hundreds of articles covering the various hedge fund leaders and topics, but in a followup blog entry, I will compile my notes and give you specific information on the individuals who spoke at SALT.



Apart from the distinguished speakers, with over 2000 attendees you didn’t have to look far for a familiar face while roaming the hallways of the Bellagio. In fact, SALT attendees became easily recognizable by what was jokingly referred to as “the SALT uniform”, which consisted of a suit jacket, no tie, top shirt-button undone and the ever-recognizable SALT lanyard.

Since SALT is all about access, it was a great time to meet up with hedge fund professionals to discuss the industry, enjoy a drink, or play a couple rounds of blackjack (often simultaneously).

Cutting Edge Technology

Trying to set aside the distractions of Vegas in order to accomplish some business can prove to be a challenge, but thankfully, SALT provided a great tool in SkyConX.

SkyConX, referred to as the “Facebook for SALT” is the easy-to-use web-based tool provided to attendees to facilitate access to the speakers and conference schedule, as well as connect with other attendees, send messages through the system, and share/view calendars to schedule times to meet.

Thanks to SkyConX, the networking started before the attendees touched down in Vegas and provided a great way to connect and stay in touch with attendees.

Entertainment

Even conferences in Vegas are not complete without planned entertainment, and at SALT this year, no expense was spared to bring some great after-hours activities for the SALT attendees.

In the evening before the first day of sessions, we were treated to a welcome Reception & Cocktail party hosted by McGladrey. The event was held in the Monet Hall that provided both an inside and outdoor area for the attendees to mingle.

After the second day the SALT, attendees moved down to the pool for Fiesta Latina sponsored by Citigroup. This was a followup to last year’s event, and included lively entertainment, food, drinks, and cigars around the Bellagio Pool.



The event that everyone was talking about after SALT was “Starry Night: A Night of Cocktails & Entertainment Featuring Grammy Award-Winning Band TRAIN”. The very intimate setting with gave Anthony Scaramucci the chance to introduced his “all-time favorite band”, Train, to the few hundred people in attendance.

As always, Train provided great entertainment to the audience, playing both their old favorites as well as a variety of their more recent hits. The ever-energetic Pat Monahan engaged with the audience, bringing attendees on stage with him to both support the band in their songs and sing the crowd-pleasing “Don’t Stop Believing”. TRAIN finished with a powerful rendition of Aerosmith’s “Dream On”.

SALT 2013 was a great success!

No event of this magnitude is possible without the help of the sponsors and the large team that handled all the logistic and organization. Kudos to the Skybridge team for once again pulling off a great conference.

Even though SALT 2013 just ended, I imagine that the Skybridge team is already laying the foundations for SALT 2014, and on behalf of the hedge fund industry, I can say that we are collectively looking forward to getting back together in Vegas for next year and can’t wait to see what the line-up is for SALT 2014.

Hedge Fund Advertising is right around the corner..FINALLY!

Hedge Fund capital raisers rejoice! The SEC has finally proposed rules to eliminate the prohibition against general solicitation and general advertising in certain securities offerings in accordance with the JOBS Act.

The SEC release states "Under the proposed rules, which are mandated by the Jumpstart Our Business Startups Act, companies would be permitted to use general solicitation and general advertising to offer securities under Rule 506 of Regulation D of the Securities Act and Rule 144A of the Securities Act."  SEC Chairman Mary Schapiro commented, “I believe that the proposed rules fulfill Congress’s clear directive that issuers be given the ability to communicate freely to attract capital, while obligating them to take steps to ensure that this ability is not used to sell securities to those who are not qualified to participate in such offerings.”

The Commission will seek public comment on the proposed rules for 30 days. Shortly thereafter, the Commission will review the comments and determine whether to adopt the proposed rules.

We have to wait 30 days for the SEC to seek public comment, and I expect there to be a LOT of comments based on the objections we have already seen from the regulated funds industry as well as those concerned with the potential for increased fraud as a result of the use of general solicitation.  So the question is, will the SEC let these comments sway their thought process and as a result further delay adoption of the proposed rules or, gasp, make the process so burdensome that it makes the JOBS Act impotent?  I doubt it.  The pressure on the SEC to put rules in place surrounding general solicitations for the hedge fund industry is enormous, and their current handling of the implementation of these rules and the delays associated have not earned them any points with the investing community.  Additionally, the Senate, Congress and the President have mandated that general solicitations be allowed in very short order, and IMHO, these are tough customers to keep waiting.

The SEC release did comment regarding making the investor accreditation process more intense as well.  It was rumored that the commission may require hedge funds to hire third party providers to verify an investors net worth and qualification status, however the SEC has taken the stance that it will be too difficult to establish rules surrounding the verification process.  The comission commented, "The SEC’s proposing release notes that proposing specific verification methods that an issuer must use “would be impractical and potentially ineffective in light of the numerous ways in which a purchaser can qualify as an accredited investor … We are also concerned that a prescriptive rule that specifies required verification methods could be overly burdensome in some cases, by requiring issuers to follow the same steps, regardless of their particular circumstances, and ineffective in others, by requiring steps that, in the particular circumstances, would not actually verify accredited investor status.”  This is great news for the hedge fund industry in that funds do not have to increase their overhead to hire new providers for this verification process.  I fear however, that the commission's language may be too nebulous and as a result may open up funds to prosecution for not doing enough due diligence on an investor.  Especially if this investor loses money in a fund that he was not qualified to participate in the first place.

Taking everything into account, as someone that owns and operates one of the biggest and most trafficked online resources for hedge fund information at HedgeCo.Net, I am starting to get very excited.  By allowing hedge funds to generally solicit, we can finally open up HedgeCo to the public and make the process of getting into the site much less burdensome.  Currently, in order to gain access to HedgeCo.Net you have to first fill out all your personal financial information online, then wait to get a phone call from one of our representatives where they will verbally verify the information posted to insure accuracy.  Only after that call does a user get access to the data on the thousands of hedge funds listed with us.  As you can imagine, this is a very inefficient process, and one that requires a lot of time and costs on our side to put people in place to make these calls to registrars all over the world at all hours of the day.  Now, by allowing users to register and immediately gain access to the hedge fund data on HedgeCo.Net, we expect our traffic to increase tremendously.

We can now also offer hedge funds the ability to advertise their fund to our large user base.  We can target different types of investors (ie: family offices, high net worth, etc.), we can target investors looking for certain styles of funds, assets under management, sharpe ratio, etc.  These types of tools and others we have created specifically for hedge funds will be very powerful for firms who are looking to grow their AUM going forward.   Also, as a result of owning not only HedgeCo.Net but also owning several other well trafficked hedge fund websites and having established relationships with hedge fund publications both online and offline, we have created the first Hedge Fund Advertising Network.  In order to make the process easy, we have already established three different advertising packages for our new clients, or, we will obviously tailor a campaign to meet clients budget requirements and target audience. You can find more information on how to advertise your fund on our site at www.advertisinghedgefunds.com

SALT 2012 Vegas- Best Conference of the Year, Now Coming to Singapore!

Every year my firm HedgeCo sponsors over one hundred hedge fund conferences around the world.  I have the option to attend many, but only typically attend a few.  The reason is, frankly, there are few conferences I feel I can learn from or have enough networking/business opportunities to merit my time away from the office.  And then of course there is the added expense, including travel, hotels and meals. This said, there is one conference I have attended the past two years that has more than exceeded my expectations, SALT.

SALT, the Skybridge Alternatives Conference, is run by Skybridge Managing Partner and marketer extraordinaire Anthony Scaramucci, and is held every year in Las Vegas around the beginning of May.  The past two years the conference was held at the opulent Bellagio, and I would estimate there were probably over two thousand people there for the conference, most registered, some crashing.

There are several reasons why I feel this conference is a 'must attend.'  First, the production quality of this event is second to none. SALT really takes the time to make sure every minute of your time in Vegas is filled with hedge fund rich activities.  This may seem boring to some, but Scaramucci and his team have figured out how to make work fun, and include activities like a San Gennaro feast style outdoor networking event, lunch with Ben Mezrich (author of The Accidental Billionaires and Bringing Down the House), and a private concert with Maroon 5.  And then of course there are the panels.  Unlike most conferences, SALT gets the big guns and has panels with titans of the industry like Dan Loeb, Phil Falcone, Eric Sprott, T. Boone Pickens, Pierre LaGrange, Leon Cooperman, and Whitney Tilson.  Also celebrity politicians like Al Gore, Sarah Palin, Karl Rove and Robert Gates. Additionally, most major providers are hosting events/parties around SALT and so every night there is another club/event to go to and network with investors, other fund managers, etc.  I saw Pitbull perform the first night for example, a few steps away from me at 1Oak and was hosted by the guys from BAML Prime at their table.  

Another reason I feel SALT is a must attend, is the conference gives you the ability to network with hundreds of industry participants all in one place.  In addition, Skybridge provides you with an online system to do so in advance of the conference.  Using Skybridge's in-house online Facebook-like system called SkyConx, registrars can communicate with one another directly via internal messaging to get the most out of their networking efforts while in Vegas.  You can sort by investor type, fund manager, provider, etc. For fund managers looking to link up with investors, you can even sort by investor type (family office, FOF, institution) and then contact these people directly to set up a time to meet.  With thousands of people, the chances of a fund manager setting up twenty plus meetings is pretty good.  

For investors, this is an amazing conference to hear from the larger fund managers about what is on their mind and where they think the markets are going.  It is also obviously a great time to meet with these hedge fund firms one on one.  You can interview a good deal of funds and conduct a lot of due diligence, all in a few days time.  You can also meet up with the funds' providers and interview them, because most major providers have some sort of presence at the conference (I would call in advance to make sure).

Lastly, for the few service providers that are allowed to attend, the opportunity to brand yourself alongside an incredibly large audience at the premier hedge fund event of the year is a no-brainer, provided you can afford it.  

With all of these amazing activities going on and of course being in Vegas (by far the best place for a conference IMHO) with a bunch of fund managers and wealthy individuals, SALT is an all around great time.  Now if Vegas is too far, or if the timing does not work for you, SALT is throwing their first event in Singapore Oct 17-19 and I would imagine this event will be as enjoyable a time as their Vegas conference (Singapore is quickly overtaking Vegas as the world's Sin City) and I would probably recommend checking it out if you are on that side of the globe and available in October. 

So to sum up, great networking opportunities, interesting panels, amazing parties and Vegas, need I say more?  See you at SALT 2013!

The JOBS Act Offers Huge Opportunities To Hedge Fund Managers

This article was published yesterday on the BusinessInsider.com, where they interview Kevin Cott (one of the lawyers I use regularly) and he offers his interpretation of how the JOBS act will effect hedge funds.  Very interesting read for those that are unfamiliar with some of the ramifications of the act and ways in which a fund manager can present themselves pending regulator comments.  See article excerpt and link to full article below:

Mike McD comment: With the passage of the JOBS (Jumpstart Our Business Startups) Act, the regulatory environment for hedge funds and other private investment managers is about to change dramatically.
I sat down with Kevin Cott, Esq. – An expert on securities law, and our legal counsel; to find out exactly how this new act will affect the industry.
In the interview that follows, we discuss the JOBS act implications for the marketing and promoting hedge funds, presentation of performance metrics, and creative avenues for managers to raise AUM (assets under management).
The situation is rapidly evolving, and it will be important for managers to stay on top of new developments.  This is true whether you are a hedge fund manager, a RIA or private investment manager, or if you are a trader considering opening your own shop.

Hedge Fund Third Party Marketing Industry is Seeing Strong Growth in Demand

Donald A. Steinbrugge, Managing Member of Agecroft Partners, LLC has written what I consider to be an excellent piece on Third Party Marketing and the state of this industry.  Please see article and link to the source on HedgeCo.Net below:


New York (HedgeCo.net) – After a tumultuous three years the hedge fund Third Party Marketing (TPM) industry is seeing very strong growth in demand from both hedge funds and investors, although this growth is not shared evenly across the estimated 500 firms in the industry due to a wide difference in the quality and reputation of TPM firms. Addressed below are reasons for the increase in demand for TPMs, the benefits of the top TPMs to investors and hedge fund managers, what has transpired in the TPM industry over the past three years and the quality difference among TPM firms in the industry.
Why the Recent Increase in Demand
The third party marketing industry is seeing strong growth in demand from hedge funds because most net flows into the hedge fund business have been concentrated in a small percentage of firms with the strongest brands. From the 4th quarter of 2008 through 2010, the definition of strongest brand meant the largest hedge funds with assets greater than $5 billion, where performance was a secondary consideration. Beginning in 2011, a small percentage of small and mid-sized hedge funds were able to break away from the crowd by building strong brands, which led them to successfully compete with their larger peers. A high quality product offering and strong historical returns are not enough for smaller mangers to attract capital. They also need to effectively communicate what their differential advantages are in order for investors to have a positive perception of the fund. In addition, they need an effective sales and marketing strategy. This is a great environment for TPMs, because there are a significant number of high quality funds that are having difficulty raising assets. Many of these managers are looking for marketing help because they realize that high-quality marketing is a critical element of a hedge fund’s long term survival.
From the standpoint of investors, the number of hedge funds has grown substantially over the years, to the extent that some investors are contacted by hundreds of managers a week. The top third party marketing firms act as a filter for high quality managers and make it easier for investors to evaluate the managers. In addition, many high quality firms are difficult to find since they do not show up in hedge fund databases.
Benefits the Top TPMs Provide to Investors
TPM services are complimentary to investors: fees are not typically paid by the investor or by the fund. They are paid by the hedge fund organization.
Screening of the hedge fund manager universe. With an estimated eight thousand hedge funds and an opaque market, it can be difficult to identify the highest quality hedge funds. The best TPMs spend significant time analyzing hedge fund databases, trade journals, and leveraging various industry relationships to identify a broad universe of managers. This universe is then narrowed down by utilizing both quantitative and qualitative screens. TPM firms then perform extensive due diligence on the top funds before making the decision to represent a hedge fund. In some cases, TPMs represent less than 1% of the firms on which they perform due diligence. If one of the firms they are representing becomes less marketable for any reason, they have the option to stop representing that organization. In-house marketers do not have this option; they need to either continue to sell the fund or find another job.

Easier to evaluate mangers. Investors don’t like wasting time with managers that are unable to effectively communicate what they do. A good TPM will help its manager consistently deliver a concise and linear marketing message that identifies the differential advantages across each of the evaluation factors investors used to select hedge funds.

TPMs can offer consulting advice relative to what strategies they think will outperform given current valuation levels and the economic environment, identify trends they are seeing among similar investors, and pinpoint where the money is going. TPMs are in a unique position since they are both doing research on hedge funds across a broad range of strategies and speaking with thousands of investors about how their assets are allocated and what strategies they currently prioritize.
TPMs are required to be licensed and regulated by the Financial Industry Regulatory Authority (FINRA). These firms are heavily regulated and are required to undergo periodic reviews by the regulatory bodies for compliance. Not all hedge funds are regulated, and their internal sales people in many cases are not licensed. As it now stands, third-party marketers face a much higher degree of regulatory scrutiny than hedge funds that have not registered with the SEC.
Benefits the Top 3PMs Provide to Hedge Fund Managers
A. Immediate enhancement of brand. Some of the top TPMs can add instant credibility to a hedge fund when they take them on as a client. This is achieved when investors have consistently been shown high quality funds by the TPM, which causes them to have a high regard for their hedge fund research process. This is similar to the credibility received by a new fund when launched by an existing high-quality hedge fund.
B. Consulting advice – This includes analyzing the fund offering based on the evaluation factors that investors use to select hedge funds and offering advice to improve any weaknesses. Strong TPMs are able to review all marketing materials and oral presentations to assure a consistently delivered, concise and linear marketing message that identifies the differential advantages across each of the evaluation factors investors use to select hedge funds. Finally, TPMs can provide marketing and sales consulting advice that identifies which type of investors the fund should be focused on, which conferences they should attend, and as a result of the new JOBS act, whether or not they should develop a publicity or advertising strategy.
C. Access to investors – Most of the major TPM firms have a large rolodex of investors and often have very strong professional relationships. Due to the multiple strategies they represent, TPM firms have the ability to meet with investors much more frequently than internal hedge fund marketers. This gives the TPM the ability to significantly increase the number of high quality meetings for a hedge fund manager and allows for better feedback and follow up from those investors.
D. Economics – Building out an internal sales force with top-quality talent can cost several million dollars, and the compensation associated with this effort remains in place regardless of how effectively assets are raised. TPMs typically are only compensated if they raise assets. If these assets are from investors the hedge fund would not have acquired on their own, then there is no cost to the hedge fund because they are receiving a majority of the fee income they would not normally have received. In addition, if the TPM can bring in assets 6 months earlier than the hedge fund would have on their own, than the increase in fee income is often enough to offset the TPM’s fee.
E. Increased probability of success – Raising assets in the hedge fund industry is not a linear process, but exponential. Part of the reason for this is that investors do not like investing in funds that are not growing. Asset-raising success gives other investors confidence to make an investment.
What Transpired Over the Past 3 Years?
Before 2008 the third party marketing industry flourished and helped many emerging managers to become some of the largest hedge funds in the industry today. This was a period of rapid expansion for the industry when it was relatively easy to raise assets for a fund and asset flows were diversified over a large number of hedge funds. It was also during this time, due to low barriers to entry, that the number of third party marketing firms expanded significantly and attracted some unprofessional and unethical individuals to the industry. This had a negative impact on some investors’ perception of third party marketers, similar to the general public’s perception of the hedge fund industry, due to a few bad apples.
From 2008 to 2011 the TPM industry was devastated for three primary reasons. To quote Thomas Paine, “these are the times that try men’s souls.” First, TPM fee revenue and asset base declined along with the rest of the hedge fund industry. Second, from the 4th quarter of 2008 through 2010, hedge fund net flows dropped off an estimated 95% from their peak and only slowly improved over this time period. The environment was even worse for hedge funds with less than $5 billion in AUM, which were a majority of the hedge funds that TPMs represent.
The final issue had to do with the public pension fund scandal led by the New York State Common Fund that was plagued with internal corruption. An official associated with the fund created a TPM firm in order to illegally get paid off by alternative investment managers for getting hired. Despite the fact that traditional hedge fund TPMs were completely innocent and most not allowed to meet with the fund since at that time they only invested in hedge fund of funds, the State of NY proceeded to blame the TPM industry in order to deflect criticism away from their own structural flaws. They first tried to get other public pension funds to ban TPMs and, when that strategy failed, they lobbied the SEC to ban TPMs. This proposed legislation was both prejudiced and insulting to the institutional quality TPM firms. During the comment period of the proposed legislation, the response from many of the leading public pension funds, who recognized the value added by the top TPM firms, was overwhelmingly in favor of the TPM industry. As a result, the ultimate “pay to play” legislation that was passed actually benefited the top third party marketing firms by leveling the playing field and making everyone play by the same rules. The new legislation applied to all asset management, alternative investment and TPM firms equally. As a result, TPMs are able to call on public funds with the exception of State pension funds in 3 states that have all had internal unethical behavior. During this time period the Third Party Marketing Association has proactively developed ethical guidelines for its members to abide by. As mentioned earlier, the top tier TPMs that made it through this period are seeing a significant increase in demand and fund flows.
Major Differences in the Quality Within the TPM Industry
Similar to the hedge fund industry, there is a significant difference in quality across the estimated 500+ firms within the TPM industry. The top TPM firms receive a disproportionate amount of attention because they have developed strong brands that enhance the credibility of the managers they represent in the marketplace. This has been achieved by those third party marketing firms that are perceived by the market as being of institutional quality, having strong investment and product knowledge, high integrity, deep consideration for the best interest of the investor and only representing the highest quality hedge funds in the industry.
Investors should differentiate between institutional quality TPMs that consistently represent high-quality hedge funds versus the lower quality organizations. For hedge funds, it is vital to hire the highest quality TPM firm possible, because it will have a major impact on how people perceive their firm. Hedge funds should use multiple factors when selecting a TPM firm, including: firm reputation, depth and quality of sales team, industry knowledge, investment knowledge, assets raised, and geographic and investor segment specialties.
Donald A. Steinbrugge, CFA
Managing Member
Agecroft Partners, LLC
103 Canterbury RD
Richmond, VA 23221

Proposed FINRA Rule 5123: Enhanced Investor Protection or Unnecessary Regulatory Burden?


Originally proposed on October 5, 2011, FINRA Rule 5123 (the “Rule”) would, if adopted, significantly increase the regulatory burden on certain issuers, such as private funds, and FINRA members involved in the private placement of securities such as third party marketers, placement agents, solicitors and finders and may encourage issuers to rely on the services of unregistered intermediaries to facilitate introductions to accredited investors. Additional, the Rule has been criticized on the basis that it departs from established practice in the realm of private placements by mandating the disclosure of specific information to investors. In particular, the Rule would require FINRA members who offer and sell private securities through the dissemination of a disclosure document, such as a private placement memoranda (“PPM”) or term sheet, to provide each solicited investor who is an accredited investor the following information prior to sale of such securities: (i) the anticipated use of the offering proceeds, (iii) the amount and type of offering expenses, and (iii) the amount and type of compensation provided to sponsors, finders, consultants and members and their associated persons in connection with the offering.  And within 15 calendar days of the date of first sale, each member would be required to file such PPM or term sheet with FINRA along with any material amendment to these documents within 15 days of such occurrence.

In response to comments submitted by various industry participants, on January 20, 2012, the SEC proposed a variety of amendments and clarifications to the draft Rule including: (i) removal of any reference implying that FINRA would review or sign-off on the offering documents before they are sold, (ii)  exemption of “institutional accounts”, “qualified purchasers”  and “investment companies”, among others, and (iii) exemption of certain offerings including those made under 4(1), 4(3) and 4(4) of the Securities Act of ‘33.

Despite the SEC’s attempt to address certain of these initial comments, the Rule continues to generate significant opposition from industry players on a number of grounds. Some of the most salient of these concerns are outlined below:   

a.       The Rule conflicts with the statutory framework for private placements long-established under Section 4(2) of the Securities Act of 1933 which, under SEC interpretation, does not proscribe any particular type of information an issuer must disclosure in the course of a Reg. D private offering. The Rule departs from the this long standing practice by requiring issuers to disclose specific information to investors regarding the offering, information akin to certain disclosures required in a registered offering.

b.      Since much, if not all, information required to be filed under the proposed Rule is already required to be provided under an issuer’s SEC filed and publically available Form D, which must also be filed within 15 days of the first private sale, it is unclear what additional transparency the Rule would provide the market post-sale.

c.       The Rule is likely to significantly inhibit the capital formation process especially for smaller funds and issuers, the placement agents that serve them and the retail accredited investors they solicit. The heightened regulatory oversight, administrative burden and compliance costs will disproportionately affect smaller market players and inhibit their ability to reach the accredited investor who make of the bulk of their investors. Additionally, the past several years have seen the introduction of a variety of new regulatory obligations on FINRA members including registration as "municipal advisers" with the MSRB and compliance with certain "pay to play" rules. Taking the cumulative increase of these compliance requirements into consideration, many smaller FINRA registered broker-dealer may be squeezed out of business.

d.      The Rule is also likely to have the unintended effect of encouraging issuers to pursue relationships with unlicensed agents not subject to the regulatory scrutiny and compliance costs imposed on registered FINRA members. Required to comply with these additional compliance obligations and costs, FINRA members will be placed at a further competitive disadvantage in to unlicensed brokers conducting business illicitly.  As FINRA and the SEC has acknowledged, since there are few resources available to pursue the hundreds, or even thousands, of finders and solicitors doing business on an unregistered basis, these entities operate with virtual impunity, and for all practical purposes, there is unlikely to be penalties for the private funds and issuers using their services.

e.      The Rule also does not specify the penalties a member firm would be subject to in the event of an unintentional late or incomplete filing or non-compliance with filing requirements. If such oversight were not part of a pattern of non-compliance, would it be considered administrative in nature or subject to more serious sanctions as a consequence of being an 'investment related' instance of non-compliance?

f.        Lastly, the Rule is likely to shift a degree of liability from issuers to placement agents in so far as member firms are required to provide "best practices" level disclosure and due diligence prior to accepting subscriptions from private placement investors. The Rule could potentially impose strict liability on member firms for information supplied by issuers over which they have little, if any, ability to verify accuracy.

Given these concerns, it remains unclear whether the SEC will ultimately approve Rule 5123. Perhaps as an indication that the agency is taking a particularly close look at the ramifications of the Rule, the SEC has requested additional comments on its potential impact on investors purchasing private securities through broker-dealers, the potential burden on members resulting from compliance requirements, and the potential impact on the capital formation process and on competition.  

The blog entry above was written by Simon Riveles from the Riveles Law Group in NYC.  The website for Riveles Law Group is www.riveleslawgroup.com.   If you are looking for legal counsel regarding hedge funds, their establishment, or securities laws generally, then I certainly recommend contacting either myself or Simon directly.  Be sure to tell him you read his article on www.capitalintroduction.com.

If you have an opinion on current hedge fund marketing/capital introduction rules or regulation, or tips on how hedge funds can further their own marketing efforts, please submit your article to support@capitalintroduction.com.
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Welcome to the Hedge Fund Capital Introduction Blog

Hedge Fund Capital Introduction can be a crucial component to a hedge fund's growth. Most bulge bracket prime brokers offer some form of capital introduction for their larger clients but finding a solid capital introduction program for smaller clients presents a challenge. This site is designed to discuss recent events and updates within the hedge fund marketing/capital introduction space. All contributors with beneficial knowledge are urged to participate.


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