The Hedge Fund Association (HFA) has asked the Securities and Exchange Commission in a comment letter to specifically tell private fund managers what they will need to do to safely verify whether investors are accredited, should they want to advertise after the rules in the Jump Start Our Business Start-ups Act (JOBS Act) are finalised.
The HFA also praised the entire proposed rule to lift the hedge fund advertising ban as a significant step to modernise securities laws that maintains the investor protections available under the current system. At the same time, it encouraged the regulator to coordinate with the Commodity Futures Trading Commission to harmonise any new rules with the Commodity Exchange Act (CEA).
While the organisation lauded the good intent of the SEC’s proposed standards for verifying investor accreditation, it pointed out that their end result might go against the original intent of the JOBS Act: to increase employment by making it simpler for private companies to raise money from investors. As the proposed regulations ask for managers only to take “reasonable steps” without defining which steps are sufficient, they could create administrative burdens and uncertainties for private issuers who intend to comply but cannot ever be positive whether they have done so.
“The SEC’s pragmatism is notable in its ‘reasonable steps’ standard, but managers need to know that what they are doing is legal before they will take advantage of new opportunities given by this law,” says Richard Heller (pictured), chairman of the HFA’s Regulatory and Government Advisory Board and author of the letter on behalf of the HFA.
According to the HFA, the SEC should define a “safe harbour,” or a provision within the regulation which will eliminate managers’ liability under the law in connection with verifying investor accreditation should they perform those activities within certain defined standards. Ideally, says the group, in order to comply it should be sufficient for an asset manager to receive a signed subscription agreement from an investor in which that person unequivocally affirms that he or she is an accredited investor. This agreement should also include a detailed description of the reason why the investor made that claim. Implementing a more restrictive “safe harbour” provision than this, the group warns, could create administrative burdens for private securities issuers and deter privacy-conscious investors.
“At the same time as lack of legal clarity can cripple businesses with uncertainty, clear laws which demand too much of investors and issuers can dampen the interest in allocating capital to private companies while greatly adding to fund managers’ operating expenses,” says Mitch Ackles, president of the Hedge Fund Association. “In drafting final regulations, we ask the SEC to keep this in mind and to remember the original intent behind JOBS Act – to invigorate the economy.”