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Practical Compliance with U.S. Regulatory Rules

Practical Compliance with U.S. Regulatory Rules. David Nissenbaum Paul N. Roth October 2005. Private Placement Rules. No general solicitation or general advertising Substantive, pre-existing relationship with a prospective investor must exist before soliciting an investment

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Practical Compliance with U.S. Regulatory Rules

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  1. Practical Compliance with U.S. Regulatory Rules David Nissenbaum Paul N. Roth October 2005

  2. Private Placement Rules • No general solicitation or general advertising • Substantive, pre-existing relationship with a prospective investor must exist before soliciting an investment • Prospective investors should be “accredited investors” & “qualified purchasers” (3(c)(7) funds) • Possible consequences of a blown private placement – • Suspend offering (6 months?), rescission rights, regulatory enforcement action

  3. Marketing Materials • Which rules apply? • SEC rules apply to all investment managers • NASD rules apply to U.S. broker-dealers • Common law anti-fraud principles also apply • What materials are covered? • Potentially any materials given to prospective investors: flip books, performance data, investor letters, etc.

  4. SEC rules (advisers) • Very technical area • Problem issues - • Incomplete/unclear presentations • Cherry picking investments shown in marketing materials • Performance must be shown net of fees • Track record presentation (actual vs. other funds/accounts) incomplete, inaccurate

  5. NASD rules (broker-dealers) • 2210(d) – “communications [must be]….fair and balanced…provide a sound basis for evaluating the facts” • Related performance prohibited for 3(c)(l) funds • Projected returns prohibited • Hypotheticals and back-tested performance effectively prohibited • Target returns effectively prohibited • Risk factors required • Consistency with the offering memorandum required

  6. Investment Advisers Act • Only registered advisers can hold themselves out to the public • Registered and non-registered advisers can participate in private placements • Client Solicitation Rule • Written agreement with solicitor/placement agent • Investor must receive the Form ADV • Selling compensation must be disclosed • Investor must acknowledge receipt of the foregoing in writing

  7. Broker-Dealer Registration • “Broker” is broadly interpreted – • Any person “engaged in the business of effecting transactions in securities for the account of others” • All brokers must be registered with the SEC and in relevant states • Finder’s exemption – does it exist? • Issuer exemption – rarely available to hedge funds • Practical compliance when there is no broker-dealer or available exemption

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