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CFTC Grants Exemptive Relief to Private Fund Managers: General Solicitation Conditionally Permitted

JOBS Act Client Alert

Author: Gregory J. Nowak

9/17/2014

The JOBS Act and the regulations thereunder (which went effective on September 23, 2013) applies to private issuers – including hedge funds and private equity funds – that want to make general solicitations within the context of their “private offerings.” The issuers can engage in a general solicitation – advertising, open website, no “old and cold waiting period,” etc. – provided they are willing to take steps to ensure that the only investors ultimately accepted as investors are so-called “accredited” investors. The statute that had authorized the new regulations applied “for all purposes of the federal securities laws.”

Many private funds use futures contracts to execute on their investment strategies and/or to introduce or hedge risk. Many of the hedging devices that are used are under the jurisdiction of the Commodities Futures Trading Commission (CFTC) and are governed by the Commodities Exchange Act, not the “federal securities laws.” As a result, fund managers that had cross-registered as commodity pool operators (CPOs) or who were relying on certain exemptions provided by the CFTC were unable to make general solicitations in reliance on the JOBS Act relief. The reason: many of the CFTC exemptions were conditioned upon neither the commodity pool nor its operator or advisor engaging in “general solicitation activity” with respect to the pool.

The CFTC issued an exemptive order on September 9, 2014 that changed all of that. While a positive development, the relief is not all encompassing and, most importantly, it is NOT self-executing. Only CPOs who are using Section 506(c) under Regulation D under the Securities Act of 1933, and certain resellers under Rule 144A are eligible to take advantage of this new relief. Issuers can now engage in a general solicitation provided they follow the requirements set out in the exemptive relief order.

To claim the exemptive relief, the CPO must file a notice with the Division of Swap Dealer and Intermediary Oversight of the CFTC. This notice requires basic information on the entities that are claiming exemptive relief pursuant to the exemptive order. Additionally, notice filings to claim the relief are intended to provide the CFTC with a reasonable estimate of how many issuers are affected by the discrepancy between the two rules, which inturn is intended to assist the CFTC to see if future rulemaking is necessary.

The claim of exemption is effective upon filing so long as the claim is materially complete and accurate. According to the Exemptive Order, the claim of exemptive relief must:

  1. state the name, business address and main business telephone number of the CPO claiming the relief
  2. state the name of the pools for which the claim is being filed
  3. state whether the CPO claiming relief is a 506(c) issuer or is using one or more Rule 144A resellers
  4. specify whether the CPO intends to rely on the exemptive relief pursuant to CFTC Regulation 4.7(b) or 4.13(a)(3) with respect to the listed pools. Specific requirements then apply with respect to 4.7(b) and 4.13(a)(3): a 4.7(b) filer represents that the CPO meets the conditions of exemption insofar as the offer can no longer be offered solely to qualified eligible persons (QEPs). While the offer requirement is lifted, the pool is still only allowed to sell participations to QEPs. On the other hand, if the CPO is relying on Rule 4.13(a)(3), the CPO must represent that it meets all the other conditions of the exemption other than the prohibition against marketing to the public.

As would be expected, the letter must be signed by the CPO and must be filed with the CFTC via email using the email address dsionoaction@cftc.gov and stating “JOBS Act Marketing Relief” in the subject line of the email.

This is a stop-gap measure and it is intended to stay in effect until final consideration by the CFTC of action that it should take with respect to the JOBS Act and conforming to the SEC’s regulatory amendments.

For additional information, including relevant publications, seminars, and webinars, please visit Pepper's JOBS Act Resource Center.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.