In a long-awaited action, on September 9th the Division of Swap Dealer and Intermediary Oversight of the Commodities Futures Trading Commission (“CFTC”) issued an exemptive letter providing relief for private investment funds using general solicitation pursuant to Securities and Exchange Commission (“SEC”) Rule 506(c). Rule 506(c), which was issued last year pursuant to the Jumpstart Our Business Startups (JOBS) Act, and allows issuers to offer securities using general solicitation, provided that certain additional steps are taken to verify that purchasers of such securities qualify as “accredited investors.”
Although Rule 506(c) was potentially useful to private investment funds looking to offer their interests to potential investors in a manner more broadly than allowed by the existing private placement exemption under SEC Regulation D (now recodified as Rule 506(b)), CFTC regulations raised a significant impediment for private investment funds wishing to use the new rule. That was because the JOBS Act and the SEC rules promulgated pursuant to it created exemptions from the securities laws and regulations, but did not affect commodities laws and regulations. In particular, since many private investment funds qualify as “commodity pools” for commodities law purposes (because they trade in futures contracts or derivatives regulated by the CFTC), their managers have often sought exemptions that have required that the fund interests being offered not be marketed to the public.
CFTC Regulation 4.13(a)(3), provides an exemption from CPO registration where the amount of trading in commodity interests falls below certain thresholds, and required that interests in the commodity pools are “offered or sold without marketing to the public in the United States.” Another widely used exemption is CFTC Regulation 4.7(b), which exempts qualifying CPOs from a number of CFTC disclosure, reporting and record keeping requirements, but which required that the commodity pool interests be sold pursuant to SEC exemptions from registration that prohibit general solicitation or marketing to the public. The new CFTC exemptive letter provides that managers of private investment funds using Rule 506(c) can still take advantage of the exemptions under CFTC Regulations 4.7(b) and 4.13(a)(3). However, those funds must comply with the requirements of Rule 506(c), and CPOs seeking exemptive relief must file a notice with the CFTC claiming relief and providing basic information on the entities seeking such relief.
Private investment fund managers may, however, still wish to consider certain issues before using Rule 506(c) to sell fund interests. The SEC has proposed certain additional amendments to Regulation D, which would place additional burdens on issuers using Rule 506(c) (such as requiring pre-filing of Form D before engaging in general solicitation, and submitting general solicitation materials to the SEC). Also, compliance with the rules of any applicable foreign jurisdictions needs to be considered.