The Division of Swap Dealer and Intermediary Oversight (Division) of the U.S. Commodity Futures Trading Commission (CFTC) on September 9, 2014 issued a letter1 granting exemptive relief from provisions in CFTC Regulations 4.7(b) and 4.13(a)(3) that prohibit general solicitation.2 The relief allows commodity pool operators (CPOs) conducting “private offerings using general solicitation” pursuant to new rules adopted by the Securities and Exchange Commission (SEC),3 to rely on exemptions offered under CFTC Regulations 4.7 or 4.13.4 The exemptive relief offered by the CFTC is not self-executing and must be claimed in order to be effective. This Dechert OnPoint focuses on the practical implications related to the CFTC relief for private offerings using general solicitation.
CFTC Regulations 4.7 and 4.13 were originally designed to complement the SEC’s private offering rules. The Jumpstart Our Business Startups Act (JOBS Act), however, altered those private offering rules. The JOBS Act amended various sections of the Securities Act of 1933 (Securities Act) to allow issuers making private offerings to engage in general solicitation.5 In response to these amendments, the SEC adopted new rules for private offerings, which for the first time provided an exemption from securities registration for private offerings while also permitting general solicitation, subject to certain conditions.6
The relief may only be claimed by eligible CPOs.7 To claim the offered relief, a CPO must file a notice with the Division, which includes: certain identifying information regarding the CPO claiming the relief; whether the CPO claiming relief is a 506(c) Issuer or is using one or more 144A Resellers (as such terms are defined in the CFTC Letter); the particular exemptive relief being sought; and a representation that the CPO will comply with all requirements (other than the prohibition against general solicitation) of CFTC Regulation 4.7 or 4.13, as applicable.8
When the SEC proposed its new rules for private offerings using general solicitation, it hoped that the elimination of the ban on general solicitation for such offerings would improve the private-issuer market by increasing: the types of issuers that raise capital; the types of investors who are solicited; and the amount of capital raised by private offerings.9 However, many private funds have not embraced the rules for private offerings using general solicitation. In part, this has been due to the lack of conforming changes to the CFTC’s rules. Accordingly, the exemptive relief in the CFTC Letter may encourage greater use.
Even with the CFTC’s changes, however, many private issuers continue to rely on traditional private offering rules, despite such rules’ prohibitions against general solicitation. Private funds using this approach may prefer the certainty of the familiar, though more limited, structure of traditional private offerings to the yet unsettled implications of private offerings using general solicitation. In particular, some in the private-fund industry are concerned that additional rules currently proposed by the SEC (Proposed Rules)10 would be overly burdensome and might discourage issuers from undertaking private offerings using general solicitation.11 Despite industry concerns, however, SEC Chair Mary Jo White has on repeated occasions called for adoption of at least some of the Proposed Rules.
In addition to the uncertain impact of the Proposed Rules, issuers considering a private offering using general solicitation should note that “bad actor” rules, recently adopted by the SEC, effectively bar any issuer disqualified under such rules from relying on Regulation D.12 Issuers considering private offerings using general solicitation may also wish to consider that states have generally not made changes to their securities laws to conform to the SEC’s rules for private offerings using general solicitation. Accordingly, if an issuer attempts to rely on the SEC’s rules for private offerings using general solicitation, but the offering fails to comply with Rule 506(c) on technical grounds, there may be no state-level offering exemptions to use as a potential fall-back plan, which is sometimes possible for traditional private offerings. Managers will also want to consider the potential impact of any general solicitation on their status in relation to the EU Alternative Investment Fund Managers Directive (AIFMD) and the potential availability of reverse solicitation.13
Given the potential uncertainty concerning which of the Proposed Rules will be adopted and what impact such rules may have, as well as the increased risks connected with a failed offering, private fund issuers should carefully consider whether to seek to rely on the recently adopted rules for private offerings with general solicitation or instead to rely on traditional private offering rules.