In the Summer 2014 issue of the PE Newsletter we reviewed a private placement platform set up by ACE Portal, in partnership with the New York Stock Exchange, to facilitate the private placement of securities by issuers. The recent modification of the SEC’s rules on general solicitation and advertising, which formerly prohibited general solicitation and advertising in private placement offerings relying on Regulation D, has created an opportunity for intermediaries to introduce innovative platforms to access a larger universe of potential investors and streamline the offering process. Although initially set up to handle traditional company private placements, we pointed out in the article (and ACE confirmed) that the platform may be useful in raising funding for private equity and other funds. This opportunity may be particularly true for mid size funds ($200- $800 million) which often have difficulty raising money in the current market notwithstanding a compelling strategy and track record. The article generated a substantial amount of interest in private fund raising through the platform and we thought it might be informative to conduct a question and answer interview with the General Counsel of ACE Portal, Jason Behrens, with a focus on fund formation. Welcome Jason.

Jason:  Thank you for including me as part of the PE Newsletter. Before joining ACE, I practiced extensively in the area of private fund raising and am pleased to discuss how ACE Portal can be useful in fund raising by PE and other funds.

Dechert: It’s probably useful at this point to briefly review the manner in which the platform operates. We understand that only placement agents, who are registered as broker-dealers (as virtually all are), may list a fund in formation on the platform.

Jason:  Only SEC-registered broker-dealers who are members of FINRA can post a fund offering on the platform. Although not the focus of this interview, I should also note that ACE is equipped to handle all private placements that are represented by a broker-dealer, including both corporate equity and debt offerings, not just fundraises. Each of our agent members executes an engagement agreement with ACE that contains several representations from the agent regarding its good standing with FINRA, required licenses, approvals and registrations and clean operating history, similar to the representations contained in a standard placement agent agreement with a fund sponsor. Currently, over 65 registered broker-dealers have joined the ACE community.

Dechert:  We know you are in the early stages of utilizing the platform for fund formations, but how many funds have been listed, and have any closed on all or a portion of their target raise yet?

Jason:  We are in the early stages in terms of fund formations, primarily because ACE’s management team made the decision to focus initially on the corporate side of the platform to leverage their expertise and relationships garnered through decades of investment banking experience. That said, ACE has received significant interest from both fund sponsors and placement agents in our recent efforts to scale on the fund side. As a result of these efforts, we have managed to break into the upper echelon of funds, an aggregate of fourteen fund offerings have been listed, and a few such funds have closed. The ACE platform was not responsible for filling the entire book for these closed funds, but the goal is to have more investment dollars come through the ACE investor member network as we continue to mature in the funds space. We are still in the early innings.

Dechert:  If a placement agent does not wish to utilize the platform for fund raising are there other features of the site which may be of interest such as downloading documents, verifications, etc.?

Jason:  In addition to the fundraising tools, placement agents can utilize ACE’s technology to manage the private placement process. Agents can track and record investor attestations, upload and organize offering materials, manage document visibility and distribution, automate the confidentiality agreement process and access ACE’s full suite of communication management tools. ACE also provides a fully integrated data room and book builder, enabling placement agents to manage their process to a closed community of investors. We like to think of ourselves as a data room on steroids.

Dechert: One attraction of your platform is its identification with the NYSE and the potential to reach an investor base which may be beyond the reach of many sponsors and even placement agents. We understand the potential investor reach is in excess of $100 billion. How does that breakdown among high net worth (accredited) individual investors, family offices and institutions, fund of funds, etc.? Are there a substantial number of wealth managers interested in the platform?

Jason:  Out of the potential investor AUM, a significant majority is backed by qualified purchasers and up (i.e., ultra high net worth investors, family offices and institutions). We have seen interest from several major wealth management firms, particularly in light of their recently stated goals to increase investment allocations to alternative assets. Note that in some cases, larger investment management firms that join ACE as one institutional investor member actually represent upwards of hundreds of millions (or even billions) of investment dollars on behalf of their clients.

Dechert:  We understand that the investor base is worldwide including a substantial interest from Asia.  Is ACE continually adding additional potential investors to the platform?

Jason:  The platform was built with an initial focus on the U.S., both from the supply and demand side of the equation, but as we continue to receive interest from abroad, our efforts are expanding to the international arena. Thus far, the majority of foreign interest has originated from Asia and Europe, but we hope this will be a global phenomenon in the not-too-distant future.

We are early stage on the demand side of the platform, as we opted to build out supply first. We did not want to invite a plethora of investors to a platform with no product, as that would not bode well for repeat visits. The jury is out on whether we chose the chicken or the egg, but the pen is expanding nonetheless.

Dechert:  We know this may be evolving, but how do you charge members of the ACE community?

Jason:  Currently, the site is free for all investor members. Placement agents that list a fund on the platform have a choice between a flat posting fee and a monthly subscription fee. Both posting fees and subscription fees differ based upon a number of factors, including data usage needs. The posting fee is a one-time charge, regardless of the length of time to close. As we continue to grow, we remain flexible regarding fee arrangements and are happy to discuss each arrangement on a case-by-case basis. We currently do not charge success fees.

Dechert:  We understand that ACE Portal/NYSE provides a platform but is not a registered broker dealer and is not responsible for, and does not review, the documents and other materials posted on the platform.  Presumably this material is the responsibility of the placement agent and sponsor?  Does a potential investor have access to the placement agent and sponsor?  Can the placement agent and sponsor screen the potential investors it wishes to follow up with?

Jason:  All documents and materials posted to the platform are reviewed and prepared by the placement agents and their fund sponsor clients. ACE does not offer or sell any securities, solicit investors for securities offerings, participate in the purchase or sale of any securities, assist in the preparation or distribution of offering materials or offer any advice in connection with any of the foregoing.  As a result, ACE is not registered as a broker-dealer or an investment adviser. Each placement agent member’s contact details are accessible to potential investors so that they can reach out directly to ask questions and further discuss the investment opportunity as desired. Notably, while ACE does not vet investment opportunities posted to the platform, we do screen potential placement agents who seek to post such opportunities. Fund sponsor contact details are not typically provided, but the discretion to do so is left to the agent and its sponsor client.

Regarding investor screening, ACE Portal provides each placement agent with ultimate discretion over what, if any, additional vetting procedures it wants to subject potential investors to prior to providing access to the private data room. It is between the placement agent and its issuer client whether or not the issuer will have a role in such vetting procedures, but the platform itself is designed as a tool specifically for agents.

Dechert:  Would the posted materials be similar to the documents utilized in any fund formation, including a private placement memorandum and subscription agreements?

Jason:  That is correct; however, thus far, the information posted to a fund data room has been limited to a brief teaser document on the investment opportunity, a private placement memorandum, and an executive summary sheet or management presentation. The form of fund subscription agreement could also be uploaded to the data room for investor downloading.

Dechert:  Whose responsibility is it to assure that investors meet the SEC test of “accredited investor” or “qualified purchaser”? Some portals with which we are familiar have attempted to incorporate this verification process through the platform, for example, investor tax returns or financials.

Jason:  It is the placement agent’s, and ultimately its fund sponsor client’s, responsibility. As we are not a registered broker-dealer or investment adviser, ACE does not vet investors, ensure investor qualifications are met or determine suitability of any fund offerings. We do, however, provide information to our placement agent members that they can utilize in their vetting procedures if desired, including status attestations made by ACE investor members. Further, we are currently in discussions with a few third parties, the primary business of which is investor verification, and we envision incorporating this as an additional service to our agent and investor members.

Dechert:    Fund raising for private equity firms can take many forms. We understand the platform could be used in a variety of fund raising situations. For instance, could a placement agent use it to fill out an offering where an anchor investor already exists? Could it accommodate side letters with different investors?

Jason:  A placement agent can use the platform to fill out an offering where an anchor investor already exists. In fact, this is a use case we specifically envisioned as we developed the site.  Given the host of marketing options provided to an ACE member placement agent, from keeping an offering invite-only, that is, using it purely as a data room and for its transaction management tools, and not for marketing to its proprietary investor member base, to marketing an offering solely to institutional investors, or opening it up to individual accredited investors, the platform provides placement agents with ultimate discretion and flexibility.

Dechert:  Private funds offered on the platform will still need to comply with the Investment Company Act.  Generally funds in formation rely on one of two exemptions under the Act:  Section 3(c)1 which limits the beneficial owners in the fund to not more than 100 investors or Section 3(c)7 which limits the beneficial owners in the fund to qualified purchasers (generally an individual with a liquid net worth of $5 million or an institution with a net worth of $25 million). If Section 3(c)7 is relied upon, all investors must be qualified purchasers, that is, the sponsor cannot “mix and match” with accredited investors and qualified purchasers. Unless the investors are all qualified purchasers, a $200 million fund, for instance, would need to average $2 million per investor to stay below the one hundred beneficial owner limit of Section 3(c)1. Do you see this requirement as a significant limitation on use of the platform? In other words, do you think that the accredited investor base on the platform has an appetite for investments at this level? Or, alternatively, does it appear that there are enough potentially interested qualified purchasers in the investor base to qualify a fund under the 3(c)7 exemption?

Jason:  These requirements do not pose any limitations on the use of the platform, as ACE’s placement agent members have complete flexibility as to whom they market their clients’ funds. As I mentioned before, agents can limit visibility to a fund’s offering on the platform to solely qualified purchasers if desired. While the platform does permit marketing to accredited investors, in our experience, we have observed that most placement agents tend to limit their marketing reach to qualified purchasers and up. Also, the majority of ACE investor members are, at a minimum, qualified purchasers. Moreover, as ACE is not a crowdfunding platform and is more institutional focused, we tend to attract investor members who are more accustomed to investments at this higher level.

Dechert:  A number of potential sponsors who are interested in listing a fund in formation on the platform have asked us how they should proceed. Is there a way to identify placement agents who are comfortable with the ACE Portal/NYSE platform and interested in considering additional fund formation clients?

Jason:  We are happy to speak with Dechert fund formation attorneys or their respective fund sponsor clients upon request to formulate a list of potential placement agents who could be a good fit for the particular fund sponsor. As a result of our members’ privacy/confidentiality requirements, we generally do not freely pass along a list of all of the agents that are registered members of ACE. In those instances where we have distributed a list of prospective placement agents, we have contacted each named agent in advance and received consent to pass along their contact details.

Dechert:  Following the SEC’s decision to relax its rules on general solicitation, a number of other intermediaries have entered the market with platforms, often it seems as their own sponsored sites. What do you see as your competitive advantage?

Jason:  The new legislation has definitely sparked innovation, and ACE is not alone in this burgeoning space.   However, unlike our perceived competition, ACE, in association with NYSE, does not disintermediate or otherwise compete with placement agents. An SEC-registered, FINRA-approved placement agent must be engaged on every offering that is posted to the ACE platform. ACE does not enable issuers to go straight to investors, and ACE is not a crowdfunding platform. We believe that placement agents play an important role in the private placement process, ensuring a certain degree of regulatory oversight and providing potential investors with access to information that is necessary to making informed investment decisions, aiding investor protection generally.

Operating in affiliation with NYSE’s globally recognized brand and co-locating in NYSE’s iconic headquarters is invaluable to ACE as we strive to become the technology backbone for the private capital markets. Our partnership with the NYSE enables us to leverage NYSE’s expertise in driving transparent, efficient, and auditable processes in the public domain and apply it to the private context. As new technology platforms emerge in this vibrant and evolving space, ACE’s relationship with NYSE will continue to be a unique differentiator for market participants.

Dechert: Thank you, Jason, for a very informative presentation.