On September 9, 2014, the Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight (the “Division”) issued a letter which provides exemptive relief to commodity pool operators (“CPOs”) of private funds from the general solicitation restrictions set forth in CFTC Regulations 4.7(b) and 4.13(a)(3).1
As a result of the adoption of this relief, private fund CPOs that are registered with the CFTC under Regulation 4.7(b) or are exempt from registration under Regulation 4.13(a)(3) may now avail themselves of the provisions contained in recent amendments adopted by the Securities and Exchange Commission (“SEC”), as a result of the Jumpstart Our Business Startups (JOBS) Act — namely, to engage in general solicitation (subject to certain requirements) under Rule 506(c) of Regulation D and Rule 144A(d)(1) under the Securities Act of 1933. (Click here for Bingham’s alert describing such amendments.)
A private fund CPO that wishes to rely on this CFTC exemptive relief must make a notice filing with the Division.
Background on the Inconsistency Between Current CFTC Regulations and Regulation D Rule 506(c) and Rule 144A, as Amended Pursuant to the JOBS Act
Pursuant to legislative directive under the JOBS Act, in July 2013 the SEC amended Rule 506 to add Rule 506(c), which among other things, removes the prohibition against general solicitation set forth in Rule 506(b), subject to certain conditions. However, private fund CPOs relying on CFTC Regulation 4.7(b) were unable to engage in a general solicitation under Rule 506(c) while also satisfying the requirement under CFTC Regulation 4.7(b) that the securities be offered solely to “qualified eligible persons” (“QEPs”).2Similarly, private fund CPOs exempt from registration under CFTC Regulation 4.13(a)(3) were also unable to comply with the conditions of such regulation because engaging in a general solicitation under Rule 506(c) would violate the requirement that such securities be offered and sold without marketing to the public (i.e., no general solicitation).
In addition, pursuant to the legislative directive under the JOBS Act, the SEC amended Rule 144A to provide that entities reselling securities in reliance on an exemption under Rule 144A are now permitted to engage in general solicitation, provided they meet the other conditions enumerated in the Rule. However, private fund CPOs using Rule 144A resellers were unable to comply with the conditions of relief enumerated in both CFTC Regulation 4.7(b) and CFTC Regulation 4.13(a)(3) if the Rule 144A reseller engaged in general solicitation. The CFTC determined it was appropriate to address these differences by granting exemptive relief from the requirements of Regulations 4.7(b) and 4.13(a)(3) enumerated above to CPOs meeting certain conditions.
Exemptive Relief From Provisions in Regulations 4.7(b) and 4.13(a)(3)
The letter provides relief to private fund CPOs that are registered with the CFTC under CFTC Regulation 4.7(b) from the requirements that an offering be exempt pursuant to section 4(a)(2) of the Securities Act of 1933 and be offered solely to QEPs. The letter also provides relief to private fund CPOs that are exempt from registration under CFTC Regulation 4.13(a)(3) from the requirement that securities be offered and sold without marketing to the public. In each case, the relief is subject to the following conditions:
- Relief Limited to Private Fund CPOs Relying on 506(c) or Private Fund CPOs Using Rule 144A Resellers - The exemptive relief granted by the letter is only available to private fund CPOs who are (A) relying on the exemption provided by Rule 506(c) of Regulation D or (B) using entities reselling securities pursuant to Rule 144A.
- File a Notice with the Division - The CPOs claiming relief must file a notice with the Division that:
- provides basic identifying information on the entities that are claiming exemptive relief;
- states whether the CPO claiming relief is relying upon Rule 506(c) or is using one or more Rule 144A resellers;
- specifies whether the CPO intends to rely on the relief pursuant to CFTC Regulation 4.7(b) or 4.13(a)(3) and represents that the CPO will comply with all other requirements of Regulation 4.7(b) or Regulation 4.13(a)(3), as applicable.
We note that there are currently proposed amendments to SEC rules relating to general solicitations that have not yet been adopted and additional uncertainty related to general solicitations, such as a requirement to pre-file general solicitation materials with the SEC. The SEC has indicated that examinations by the SEC staff will, in particular, focus on compliance by managers using general solicitation under Rule 506(c). In light of these unsettled issues, the CFTC has provided that the relief will remain effective pending any final CFTC action in consideration of the JOBS Act and any SEC regulatory amendments related to general solicitation.
Impact on Private Funds
As many hedge funds and private equity funds currently rely on relief set forth in CFTC Regulation 4.7 or 4.13(a)(3), this relief could have a significant impact on the way hedge funds, private equity funds and other private funds raise capital and may lead to an increased utilization of Rule 506(c) offerings. Issuers and their advisers should bear in mind that the opportunity to engage in general solicitation comes with increased responsibilities for due diligence with respect to verification of the accredited investor status of potential investors, and must also be considered in light of any applicable compliance obligations under other applicable rules and regulations, including under the Advisers Act.