For Private Equity Firms, Marketing Provides Unique Opportunities (and Unique Compliance Dangers)

For private equity advisers, how to market a private equity fund in compliance with SEC rules should be a major focus area. Unlike hedge funds (which are usually evergreen), private equity funds have finite investment period and lifespans, and fund managers are out to market with their next private equity fund on a regular basis.

Unfortunately, there is a great deal of risk that comes along with the marketing process for private equity firms. Fund managers need to take a variety of steps to ensure they comply with SEC guidance once the marketing phase begins in earnest. To sum it up, a “pre-existing relationship, substantive” relationship with a prospective investor is required before a private equity adviser (or person acting on its behalf) before offering a private equity fund to the prospect.

“Pre-Existing Relationships” and Private Equity Marketing

To attempt to simplify a complex and murky matter, in order for private equity firms to stay within SEC Guidance and Rule 506(b)’s “safe harbor” provision (and thus avoid the compliance burden that comes along with a general solicitation), a private equity firm must, among other things, form a “pre-existing, substantive relationship” with prospective investors (learn more about Rule 506 Regulation D exemptions here).

The issue of whether or not a relationship is “pre-existing” or “substantive” was discussed in the Citizen VC No-Action Letter, which admittedly still left some matters unclear.

Determining whether or not your firm is properly establishing such “pre-existing, substantive” relationships, of course, falls under the purview of the services we offer as the definition certainly contains a fair bit of gray area.

Though most private equity firms spend an enormous amount of time on their funds’ PPMs, a clear vetting process must be in place to ensure a “pre-existing, substantive” relationship is first established with prospective investors. Work needs to be done to verify that such a relationship is formed and that a firm is situated to send a fund’s PPM and offer its securities to investors. This is where the help of experienced compliance counsel becomes crucial.

Consult a Professional to Ensure Your Marketing Is in Compliance

When you don’t make the small investment, early on, with an outside legal adviser that knows the regulatory space, you may find yourself wishing you had a few months down the road. 

Compliance can be burdensome, and for both emerging and long-established private equity firms, marketing activities are both difficult to navigate (from a compliance standpoint) and critical to the success of your firm.

Contact us today to learn more about how Jacko Law Group, PC can help you navigate these difficult issues and lay the groundwork necessary for your firm to succeed in the long term.

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