Hedge Fund Advertising Weighed

Terry Flanagan

Starting September 23, will hedge fund managers be queuing to sit down with CNBC’s Maria Bartiromo, competing as aggressively in promoting their funds as they do in markets and trading?

When the Jumpstart Our Business Startups (JOBS) Act lifts the 80-year-long ban on general advertising and public solicitation by issuers of unregistered securities, some hedge funds will seek to evolve their marketing and brand.

Hedge funds “will have to decide on the pros and cons. They’re weighing it. Some really want to do it. Some really don’t,” said Jay Gould, a partner in the investment funds practice at Pillsbury Winthrop. “The multi-billion dollar funds with deep institutional relationships don’t want to offend their clients.”

Another consideration is that by advertising, a fund might subject itself to more general regulatory scrutiny, Gould told Markets Media.

Some hedge funds are readying themselves for at least some marketing and branding initiatives, and at least one has already acted. Last month, Mitch Ackles of Hedge Fund PR tweeted “@JonathanHoenig’s Capitalistpig: Proud to be the first #hedgefund to advertise publicly since 1932.”

The Capitalist Pig ad in Crain’s Chicago Business featured a photo of three young quant types viewing the Chicago cityscape at night from a high-rise ledge, with a quote from Ayn Rand.

Even with a green light, uncertainties remain as to how the U.S. Securities and Exchange Commission will interpret the JOBS Act under various scenarios that may present areas of gray.

“It means that private funds can advertise generally (by) putting performance numbers on their website, sending direct mail, and appearing on CNBC,” said Gould. But for example, “if you’re doing a Regulation C (Rule 506) offering and want to stop and go back to the old rules, it becomes an issue.”

Another example of a gray area might be if the firm finds it is not worth going through the necessary additional accreditation steps for prospects, but it was doing a public offering and had the information on the internet for six months.

For an existing fund investor, it doesn’t make much difference. But potential investors may be deemed pre-existing substantial relationships because they saw information about the fund. “If you are publicly soliciting and you decide not to late in the offering, you can’t rely on safe harbor,” Gould said.

Gould cited potential remedies, such as waiting a period so the public offering (under new rules) is not integrated with the private offering (under old rules). But it would take six months for the fund manager to cease the offering, file Form D, and then file for the private offering with a new Form D.

One way fund managers could go from public to private without waiting six months is to use the five-factor test  for safe harbor in Rule 502(a), but this would be a fairly tough test for most hedge-fund managers, Gould recently wrote in a blog post.

Which hedge funds will avail themselves of the loosened rules under the JOBS Act, and which will find too few benefits for their business model will become a case study sure to be watched by rulemakers and asset managers alike. “A year from now it will be interesting to see which funds, and how many, filed Form D,” Gould said.

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