When the SEC finalizes proposed rules that eliminate the
prohibition on general solicitation and general advertising,
private funds will be free to jump in and publicly offer their
Not so fast, especially if the private fund is a commodity pool
under the Commodity Exchange Act.
Among other things, Section 201(a)(1) of the JOBS Act mandated
the SEC to revise Rule 506 of Regulation D under the Securities Act
to eliminate the prohibition against general solicitation and
general advertising for offerings to accredited investors.
Section 201(b) of the JOBS Act amends Section 4 of the Securities
Act of 1933 to clarify that offerings made under Rule 506 won't
be considered public offerings under the federal securities laws if
they rely on the exemption.
Private funds, including hedge funds that are also commodity
pools, typically rely on Section 4(a)(2) and Rule 506 to offer
their interests without registration under the 1933 Act.
Private funds also generally rely on exclusions from the definition
of an investment company provided by either Section 3(c)(1) or
3(c)(7) of the Investment Company Act. But, as a condition to
rely on either of these exclusions, the issuer must be one that is
not making and does not propose to "make a public
offering" of its securities.
The SEC's long-awaited rule proposals implementing Section
201(a) recognize the issue. The SEC unambiguously stated that
it believes that Congress, in adopting Section 201(b) of the JOBS
Act, intended to let privately offered funds make a general
solicitation under amended Rule 506 "without losing either of
the exclusions under the Investment Company Act."
While the JOBS Act addresses private offerings for purposes of
the federal securities laws, it does not specifically address how
the Section 201(a) would apply to regulation of commodity pools
that are exempt from registration under the CEA.
In particular, consider CFTC rule 4.7 and rule 4.13(a)(3), which
exempt certain hedge funds and other commodity pools from the
CEA's registration requirements. A fund can rely on rule
4.7(b) only if it "offers or sells participations in a pool
solely to qualified eligible persons." It is not clear
whether this condition prohibits marketing to the public, as
contemplated in the proposed amendments to Rule 506.
Similarly, a fund can rely on the de minimis exception, rule
4.13(a)(3), only if the pool interests are exempt from registration
under the 1933 Act "and may not be marketed in public in the
The result is that the CFTC's rules are not in harmony with
the federal securities regulations. That is, private funds
that invest only in securities and security-based swaps, may engage
in general solicitation and advertising, while private commodity
pools, including those that rely on the rule 4.13(a)(3) de minimis
exception, would not be able to engage in general solicitation and
The Managed Funds Association makes a cogent argument in its
July 17, 2012 comment letter to the CFTC concerning
harmonization of compliance obligations under JOBS Act and CFTC
We hope the CFTC gives serious consideration to the MFA's
Because of the generality of this update, the information
provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular
In this newsletter, we provide a snapshot of the principal European, US and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.