Given the volume of potential limited partner defaults this year, general partners are understandably very keen to help their limited partners in any way possible to avoid a default through a secondary sale of the limited partner interests. However, a general partner needs to consider a number of factors when facilitating sales of limited partner interests, including whether it is acting as a broker. This concern is in addition to all of the other concerns that any secondary transfer raises (publicly traded partnership issues, fiduciary issues, eligibility of the transferee, Investment Company Act issues, Investment Advisers Act issues (has the transferee become a “client”?), confidentiality, etc).
Although there is no bright line guidance for when a general partner's role in a secondary purchase amounts to “effecting transactions in the securities for the account of others” and subjects the general partner to potential regulation as a broker-dealer under the Securities Exchange Act of 1934, set forth below are some general preliminary guidelines general partners should consider when facilitating transfers of limited partner interests.
This is preliminary guidance only, and each of these factors will need to be assessed in light of its degree and frequency. A general partner should seek the advice of counsel before taking it upon itself to track down buyers for the fund interests of limited partners that it fears may default.
High Risk General Partner Activities
- Receiving Compensation in Connection with a Sale. If the general partner receives any form of compensation in connection with the sale of a limited partner interest, this could be a “bad fact” in analyzing the general partner’s activities in the context of potential brokerdealer regulation. General partners should note that compensation may take subtle forms, such as the release of unrelated claims or an overly broad indemnification of the general partner (including with respect to claims unrelated to the transfer).
- Advertising the Sale of Limited Partner Interests. A general partner could be considered to be holding itself out as a broker if it facilitates sales by announcing that limited partner interests are available for sale, even if it limits this announcement to pre-screened accredited and otherwise qualified transferees.
- Participating in the Sale Discussion. If the general partner takes the lead in structuring or negotiating the business terms of the transfer, including, especially, the price (which could arise subtly when the general partner is asked to weigh in on what constitutes “market terms” for sales of interests in today’s market), it may be effecting transactions in the securities of others.
- Soliciting Potential Purchasers. A general partner should be careful that whether through advertising or otherwise, it is not actively soliciting potential transferees or purchasers for the sale of a limited partner interest.
Low Risk General Partner Activities
- Reviewing Transferee Eligibility. A general partner's due diligence review regarding the transferee to ascertain such transferee’s compliance with investor eligibility is a necessary function in connection with any fund’s compliance and should not in and of itself raise brokerdealer concerns.
- Providing Fund Information. Prospective transferees will obviously want to diligence limited partner interests as thoroughly as possible. The provision by the general partner of recent quarterly reports and a private placement memorandum (with appropriate disclaimers) to prospective transferees should also be an acceptable activity. Note that the prospective transferee should be subject to a confidentiality agreement and the general partner should be careful about providing any information that has not already been provided to (or that is being shared simultaneously with) existing limited partners.
- Putting Seller and Buyer in Touch. Passively putting in contact (i) a selling limited partner who has, on its own initiative, contacted the general partner and (ii) an interested buyer who has, on its own initiative, contacted the general partner expressing an interest in purchasing a limited partner interest should not raise issues.