An era of unprecedented transparency in private equity may soon dawn, now that the U.S. Securities and Exchange Commission has lifted the ban that prohibited private funds from general solicitation and advertising. New rules, required by the Jumpstart Our Business Startups (JOBS) Act, allow hedge funds, venture capital and PE funds to promote their offerings to the public via media, including the Internet, print and broadcast outlets.
Under the amendments to Rule 506 of Regulation D and Rule 144A, which go into effect Sept. 23, issuers will be permitted to use general solicitation to offer unregistered securities, as long as all sales of the security are made to "accredited investors" or to "qualified institutional buyers."
Before the amendments, private offerings have been required to remain, well, private. General solicitation, including advertising was verboten since the Securities Act of 1933. The ban on general solictitation precluded private fund managers from discussing fundraising in the press or by any means that was widely distributed, such as corporate websites. PE firms were reticent to discuss their strategies in depth or to share information about return on investments with the media or on their own websites, out of fear that the SEC would interpret the information as a general solicitation. While the rules may have been well-intentioned, they have led to a shroud of secrecy that has made it difficult for investors, journalists and other observers to compare performance across PE firms.
"In the past, fund managers have been reluctant to disclose fund performance metrics," explains Scott Gluck, a Washington, D.C.-based attorney at Venable LLP. "Attorneys and compliance officers have told them not to discuss performance."
Potential investors in PE firms have not been completely in the dark, Gluck points out. Limited partners receive updates every quarter and audited financials every year. And PE firms have been allowed to convey information one on one, but "it has been difficult, particularly for smaller foundations and smaller pension funds, to get data on specific funds and to compare how several middle-market funds have done," says Gluck.
The new rules will "encourage funds to convey more information to the public about fundraising activities, deals they've done and exits they've made."
Don't look for a sea change right away. In connection with the new rule, the SEC voted to issue a rule proposal requiring issuers to provide additional information. The public has until Sept. 23 to comment on the proposal. PE firms are likely to exercise caution, says Gluck. "I think we'll see firms take small baby steps before releasing performance data. The main changes will be on websites and in social media."