Private Equity Fundraising Mistakes

Private Equity Fundraising Mistakes


In today’s market, private equity fund and
hedge fund managers are raising billions of dollars. What are the rules of the road for fundraising
these days? And what are the consequences for violating
those rules? Hi, I’m Jeff Tabak. I’m going to talk to you a little bit about
what it takes to fundraise in today’s market. So, if you want to engage in a private placement
of your securities, which is what managers do when they raise money for private equity
and hedge funds, there are certain rules you have to follow. Number 1: you are subject to the private placement
exemption that keeps you from registering with the securities exchange commission. The safe harbor for the private placement
under the securities act is known as Regulation D. That requires fund managers to sell to
accredited investors. So, what are the criteria for accredited investors? Well, individuals have to have a net worth
of at least 1 million dollars, or an income of $200,000 in any year, or $300,000 with
their spouse for two years and a reasonable expectation of that same income for the current
year. And entities have to have at least $5 million
of net worth. If they satisfy that, they are going to be
accredited investors. It’s also possible to raise money from not
more than 35 non-accredited investors. But most private equity funds and hedge funds
don’t need to use the “not more than 35” non-accredited investors, because they have
such large minimums to invest to begin with; it’s just not worthwhile. So now I’ve described who you can solicit,
but there’s also the question of the manner in which you can solicit investors. The SEC has said that you cannot engage in
a general solicitation or any kind of media advertising to raise money. That’s anathema to a private placement. So again, when clients call me up and ask
what they can do, the first thing I tell them is they can’t go into central park and distribute
private placement memoranda to anybody who walks by. They need to have a relationship of some type
with the investors that they are going to solicit. No cold calls, no emails to people they don’t
know. And this is especially true in the age of
the internet, where anything you say might be accessible to anybody who turns on their
computer and accesses a website. And so, what has developed over the course
of the last few years is a password-protected website, at least a portion of the website
that gives information about the particularfund that’s being raised so that only current
investors and prospective investors who have the financial sophistication and the ability
to invest in the fund can have access to information about that fund raise. So how do you avoid general solicitation? Well the first thing that we do is send a
memo to our clients that tells them things they should not do. One of them, for example, is to go on CNBC
and be interviewed about their fund raise. Or to be on any other media or other program
or be in the newspaper talking about what they are doing. That’s not to say that you can’t go on
TV and be interviewed; you can talk about your business in general. But if somebody were to ask you a question
about your fund raise, the answer should be no comment. Private equity fund managers, especially when
they are successful, like to talk about their returns. So, one of the things that’s important for
them to know when they’re raising a fund, is they need to be careful not to talk too
much about their business or their potential fund raise. The consequence of doing that though are severe. Number one, if you have violated the general
solicitation rules, there is a possibility that you may have to have a cooling-off period
of up to 6 months. One of the most difficult things to tell a
client is they have to stop fund raising for at least 6 months. After the fund is closed, there is a possibility,
if general solicitation was engaged in, that the investors would have a rescission right. They’d be able to ask for all of their money
back and possibly disgorgement by the manager of any of its prophets. It’s also difficult because the manager
not only shouldn’t talk about the actual fundraise, but maybe restricting what he can
say about his actual business, any other products that he has, because it may be seen as priming
the market. In the private equity fund context, where
the manager might have successor funds, what that also means is that they shouldn’t go
on TV or anywhere else and talk about their returns from their prior funds. That may be seen as being of interest to prospective
investors to invest in their future funds, and that also might be seen as a general solicitation. So, if a private fund manager is out raising
fund 6, and has just had a very successful exit from fund 5, he needs to be very careful
about how he describes that. There is an exception to that. If the fund manager has a history of issuing
press releases to announce the sale of a business, then that would be something that he would
be entitled to do going forward. But you wouldn’t want to start that in the
middle of the fundraise if you’ve never done that before. So, raising a private equity or hedge fund,
means raising money in a private manner without any general solicitation. So that’s private equity rule making 101. I’m Jeff Tabak. Thanks for watching Talks on Law.

One thought on “Private Equity Fundraising Mistakes

Leave a Reply

Your email address will not be published. Required fields are marked *