The big legal news in September was that the staff at the Commodity Futures Trading Commission (CFTC) published an exemptive letter No. 14-116 (available here) that allows certain commodity pool operators (CPOs) to engage in general solicitation and advertising in private offerings of pool interests under Rule 506(c) of the Securities Act. This long-awaited relief comes over a year after the SEC adopted its Rule 506(c) that provides for general solicitation and advertising in private placements pursuant to the JOBS Act.
Fund managers have to register as CPOs if they operate or solicit funds for a commodity pool (with limited exceptions). A commodity pool is a fund that trades in futures contracts, options on futures, retail off-exchange forex contracts or swaps, or invests in another commodity pool. Registering as a CPO is not an easy process. It requires associated persons to take a Series 3 exam, among other requirements. All CPOs must become members of the National Futures Association (NFA). You can find more information about this here.
The exemptive relief is available to those CPOs that are exempt from registration under the CFTC Regulation 4.13(a)(13) or are registered but exempt from certain disclosures under Regulation 4.7(b). Previously, such CPOs were expressly constrained by applicable regulations from engaging in general solicitation or advertising. Now, all these CPOs need to do is file a notice by email with the CFTC's Division of Swap Dealer and Intermediary Oversight providing basic identifying information about the CPO and the fund, indicating reliance on Rule 506(c) and promising to comply with all other applicable requirements. The exact content requirements are in the Letter.
So, will we now see an increase in the use of general solicitation and advertising by private fund managers? So far, only a minority of funds have relied on Rule 506(c) in raising capital, in part due to the lack of conforming changes to the CFTC rules. It is possible that now more funds will resort to general solicitation and advertising. However, it is still unlikely that the use of general solicitation and advertising in raising capital by funds will become the norm. There are several reasons. First, established funds prefer to raise capital from either the existing investors or those with whom they have pre-established relationships, so there is no need for them to advertise to the general population. Second, there is a concern over the SEC proposed rules that seek to further regulate Rule 506(c) offerings, potentially making them overly burdensome. Finally, all Rule 506 private placements are now subject to "bad actor" rules that bar any issuer disqualified under these rules from relying on Regulation D (including for failed offerings).
In conclusion, considering the uncertainty surrounding the proposed SECs rules and the increased risks of a failed Rule 506(c) offering, fund managers should carefully consider whether engaging in an offering involving general solicitation and advertising is really worth it.
This article is not a legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga. Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.