The hedge fund world has always walked a fine line when
it comes to attracting new investors. And nowhere has this line been
thinner than the one between "finders" and "solicitors" - the parties who
act as the middlemen in the investor location process.
According to SEC rules, a "finder" can act on behalf of a
fund to simply locate investors and introduce them to fund management without
having to register as a broker-dealer, because by only being an "introducer",
they are not engaged in the business of effecting securities
transactions. A "solicitor" on the other hand, may provide additional
information and advice to an investor, such as offering documents, due
diligence materials and fund performance information, and therefore has
crossed over the line to effecting a securities transaction and requires
registration as a broker-dealer (or association with one). A major recent
enforcement action by the SEC against Ranieri Parnters LLC, one of its
senior partners, and a "finder" who was found to have crossed over the line to
"solictor" outlines the state of these rules at the current time.
This sounds simple enough, but in real life it may be
hard to define roles and limit communications. In particular, once the JOBS Act
rules are put in place which would allow general solicitations and advertising
of private placements, there may be confusion as to the source of information
investors have received. Did the investor's private placement memorandum
come from the "finder" or the firm's website? Did the investor's information on
fund performance comes from the "solicitor" or the manager's talk at a recent
conference? We foresee the need for these types of issues to
be addressed in the future.
We will continue to monitor developments in this area. In
the meantime, for further detail on how the line was crossed in the Ranieri
case, please see the SEC's Order at http://www.sec.gov/litigation/admin/2013/34-69091.pdf
Read more articles about the hedge fund industry
and related legal issues at Hedge Rows, a blog by Judith Gross.
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