Attention hedge funds, private equity funds, venture capital funds, and other private funds (collectively, “private funds”). This evening (September 9, 2014) , the CFTC Division of Swap Dealer and Intermediary Oversight (“DSIO”) issued CFTC Letter 14-116 providing exemptive relief (for some funds) from the general solicitation restrictions in CFTC Rule 4.7 and CFTC Rule 4.13(a)(3) to harmonize the CFTC rules with the SEC rule changes arising from the Jumpstart Our Business Startups Act (the “JOBS Act”).
CFTC Letter 14-116 is available here.
Until now, many private funds have been unable to take advantage of provisions in the JOBS Act permitting general solicitation investors due to restrictions in CFTC Rule 4.7 and CFTC Rule 4.13(a)(3). Those readers familiar with the JOBS Act and CFTC Rule 4.13(a)(3) and CFTC Rule 4.7 can skip the next three paragraphs and move straight to the exemptive relief.
Private funds generally rely on the safe harbor for private offerings of securities in Regulation D of the SEC Rules. Previously, Regulation D precluded private funds relying on that safe harbor from offering or selling its securities by any form of general solicitation or general advertising. Congress enacted the JOBS Act in 2012. In July, 2013, the SEC amended Regulation D to implement section 201(a) of JOBS Act. The amendment added SEC Rule 506(c), which permits issuers such as private funds to engage in general solicitation or general advertising in offering and selling securities pursuant to SEC Rule 506, provided that all purchasers of the securities are accredited investors, and issuers take reasonable steps to verify that such purchasers are accredited investors. (For additional information on the JOBS Act and private funds, see a previous Client alert, SEC Lifts Ban on General Solicitation by Private Funds, by Justine Patrick and Thao Ngo).
However, the operator (most often the investment manager) of any private fund using derivatives regulated by the CFTC would have to either register as a commodity pool operator (“CPO”) or claim an exemption from registration as such. Private funds typically rely on either:
- CFTC Rule 4.13(a)(3)–providing an exemption from CPO registration with respect to pools with a de minimis amount of derivatives and where investors are sophisticated; or
- CFTC Rule 4.7–providing an exemption from certain CFTC rules for CPOs with respect to pool offerings limited to qualified eligible persons.
Both CFTC Rule 4.7(b) and CFTC Rule 4.13(a)(3) include restrictions on marketing the pool to the public or offering the pool securities to the public. As a result, although the Jobs Act removed general advertising and solicitation restrictions for private funds (so long as only accredited investors purchased the securities), if those private funds relied on CFTC Rule 4.7 or CFTC Rule 4.13(a)(3), then the CPO was still precluded from generally soliciting investors.
Enter CFTC Letter 14-116. CFTC Letter 14-116 provides relief to certain CPOs from the requirements in (i) CFTC Rule 4.13(a)(3)(i) that securities be “offered and sold without marketing to the public”; and (ii) CFTC Rule 4.7(b) that an offering be exempt pursuant to section 4(a)(2) of the 33 Act and be offered solely to qualified eligible persons. The exemptive relief is subject to conditions.
First, only CPOs of issuers relying on SEC Rule 506(c) under Regulation D or using resellers under SEC Rule 144A may qualify for the exemptive relief in CFTC Letter 14-116.
Second, CPOs claiming the exemptive relief must file a notice with the DSIO.
Third, the CPO must represent that it meets all of the remaining provisions of the applicable exemption. The pool securities offered generally may not be actually sold to the public. Additionally, a CPO relying on CFTC Rule 4.13(a)(3) could not market the pool as a vehicle for commodity futures or options trading.
A long awaited harmonization for private funds. The Swap Report