Monday, October 12, 2015
FUND FORMATION & INVESTMENT MANAGEMENT
Private Fundraising on the Internet:
The U.S. Securities and Exchange Commission (“SEC”) recently issued a no action letter that provides guidance to issuers wishing to conduct a traditional private placement under Rule 506(b) online (the “CVC Letter”). The SEC’s Division of Corporate Finance effectively confirmed policies and procedures that would allow issuers to have more of an online presence without being deemed to have engaged in a general solicitation, which would subject the issuer to additional requirements imposed by the new Rule 506(c), the most significant of which is the requirement that the issuer obtain independent verification of the investor’s status as an accredited investor.
Now, by following the procedures set forth in the CVC Letter, an issuer is able to offer securities to potential investors that it initially met on the internet, without the interaction being deemed a general solicitation. A key element of the policies and procedures set out in the CVC Letter is developing a pre-existing, substantive relationship with the potential investors an issuer meets online prior to offering any securities. Citizen VC’s policies and procedures stressed the time and efforts it would take to get to know potential investors before accepting them as members and giving them access to the password protected part of the website to navigate possible investment opportunities. Essentially, a private placement that occurs online should look very similar to a private placement taking place offline and the policies and procedures laid out in the CVC Letter provide a helpful guidance for all issuers conducting a traditional private placement under Rule 506(b) online as well as offline.
In a world where conducting business online has become the new normal, this no action letter is a very exciting step forward for issuers.
Proposed Amendments to Form ADV:
In May, the SEC proposed amendments to Form ADV that are designed to make the form easier to understand, more efficient and to gather additional information from investment advisers. The proposed amendments would require investment advisers to report additional information on their separately managed account clients as well as other aspects of their advisory businesses. In addition, the proposed amendments seek to make the registration process for multiple private fund adviser entities operating as a single advisory business more straightforward by updating the form to accommodate a single umbrella registration.
With the increased number of private fund advisers registering with the SEC and states, it has become apparent that the Form ADV needs to be updated to accommodate the varying legal structures of private fund advisers. Currently, the Form ADV is designed to accommodate the registration of an adviser structured as a single entity. However, many private fund advisers are organized as a group of related advisers that could potentially have to file multiple registration forms for the same advisory business. While the SEC has provided some guidance for certain conditions where an adviser may file a single Form ADV on behalf of itself and other advisers that are controlled by or under common control with the filing adviser, the usefulness of this guidance can be limited by the current design of the form. In addition to amending the form, the instructions would indicate when this type of umbrella registration would be available. Accordingly, the proposed amendments would provide much needed clarity and guidance to allow this type of umbrella registration to take place more efficiently.
We will continue to monitor these and any new proposals that are relevant to our clients.
Electronic Filing Depository:
In addition to making Form D filings with the SEC, private fund sponsors often must contend with notice filing requirements imposed by the states in which interests in private funds are sold to investors. For many, this is a cumbersome and confusing process that often results in non-compliance with the filing requirements.
However, the North American Securities Administrators Association (“NASAA”) has launched the Electronic Filing Depository (“EFD”) aimed at enhancing the efficiency of the regulatory filing process for certain exempt securities offerings. Initially the EFD system will be limited to Form D filings for Regulation D, Rule 506 offerings, however, NASAA expects the filing system will be expanded to include additional state securities registration and notice filing materials.
Based on our experience with Regulation D private offerings and notice filings, we believe the EFD system will make the process considerably more efficient. In addition to filing fees required by the states, there is a one-time system use fee for each offering making its filings through EFD.
 Citizen VC, Inc. No Action Letter (publically available August 6, 2015).