Investment Fund Law Blog - Legal News Updates for Investment Fund Managers & Investors : Pillsbury Winthrop Shaw Pittman LLP

Written by:  Jay B. Gould 

The recently enacted JOBS Act[1] requires the Securities and Exchange Commission (“SEC”) to promulgate rules that would effectively repeal the ban on general solicitation and general advertising under Rule 506 of Regulation D by private issuers, including private funds.  Pursuant to the JOBS Act, the SEC has 90 days from the date of enactment (July 4, 2012) to adopt rules implementing this provision.   In advance of publishing proposed rules, the SEC has started accepting comment letters on all aspects of the JOBS Act, including the repeal of the ban on general advertising.  

Unsurprisingly, the Investment Company Institute (“ICI”), the lobby organization for mutual funds and other registered funds, has submitted a comment letter requesting that the SEC take a slow and deliberate approach to permitting private funds to generally advertise and solicit investors.  How slow and deliberate?  The ICI suggests that performance advertising by hedge funds should be prohibited altogether until the SEC has had the opportunity to study hedge fund advertising, “gain experience with private fund advertisements,” and craft a rule similar to Rule 482 to which mutual fund advertising is subject.  The ICI tells us that Rule 482 is the culmination of 60 years of experience and that the SEC “should follow the same path here,” referring to advertising by hedge funds and other private funds.  60 years?  Really? 

The ICI has a long and storied history of blocking financial innovation and expansion of investment opportunities for the investing public.  You may recall that the ICI sued the Office of the Comptroller of the Currency in an attempt to block banks from acting as investment advisers to mutual funds, a case that they ultimately lost at the Supreme Court.  It is hardly surprising then that the mutual fund lobby would line up against competition by the private funds industry, even at a time when the registered funds and private funds businesses are converging at a rapid pace in terms of product offerings, investment strategies, and regulatory oversight and reporting.  Last August the SEC issued a “concept release” that requested comment on whether registered funds should be able to use the same sorts of investment techniques and to the same extent as private funds, such as hedging, shorting, and use of leverage.  Further action in this regard, coupled with the new reporting obligations of private funds as a result of Dodd Frank (e.g., Form PF) will serve to further blur the lines between registered and unregistered funds. 

In addition to “urging” a ban on performance advertising and promoting the idea of other “content restrictions” by hedge funds and other private funds, the ICI suggests that private fund advertising should be subject to FINRA review to the same extent as mutual fund advertising, and that private fund advertising be clearly distinguished from mutual fund advertising.  The ICI further suggests that the SEC should raise the net worth threshold for “accredited investors” in order to insure that private fund investors have the requisite sophistication to withstand the riskiness associated with private funds (See legalaffairs March–April 2004 issue).  The ICI endorses a $600,000 annual income and $3 million net worth standard, a measure that would further reduce the potential private fund investor pool and drive more investors to the registered world. 

More balanced voices have also started to comment on this issue, so it remains to be seen how much weight the SEC will ultimately attribute to the ICI comment letter.  You may view all of the comment letters regarding the repeal of the ban on general solicitations here.    And you are encouraged to submit your own.

[1]   The Jumpstart Our Business Startups Act.

Written by: Samuel Pearse and James Campbell

In the grand scheme of Greece’s debt problems, the sum of approximately €450m may appear modest but tomorrow (15 May) the next repayment of principal is due on foreign law bonds issued by the Hellenic Republic.  In a high stakes version of Morton’s Fork, whether the fractured Greek government decides to pay or default there are potentially undesirable outcomes.

As the bonds due for repayment are governed by English law the Greek government will find it difficult to impose its own will upon the bondholders.  Followers of the crisis will recall that Greece forced through the restructuring of Greek law governed bonds by enacting new legislation, with retrospective effect, that allowed the government to enforce collective action clauses.  They have no such power with foreign law bonds.  At the end of March, Greece put a restructuring proposal to the holders of the outstanding 36 foreign law bonds, and in 20 cases the proposal was not passed, including the bond due for repayment tomorrow.

Greece finds itself with a stark choice: default or pay up.

Default and Greece can expect the holders of the bonds to give their lawyers the green light to prepare lawsuits to be filed on the expiry of the 30 day cure period.  Add to the mix the inevitable arguments concerning breaches of negative pledges within the foreign-law debt instruments, and also creditors seeking to attach other assets under the emanation principle, and Greece will find itself embroiled in far-reaching and long-running litigation, leaving aside the questions of continued membership of the Eurozone.

Should Greece pay then it would be seen as a victory for the hold-out strategy, emboldening the holders of the other 19 foreign law bonds which have not been restructured.  We could also see protests from those bondholders who agreed to a debt restructuring on the basis that Greece said that there was no money available to doing anything else.  Such “co-operative” bondholders may explore the possibility that such misrepresentations are actionable.

Either way, holders of Greek bonds should be considering their strategies and preparing for either outcome.  As John Dizard eloquently comments in today’s Financial Times (‘Holdouts get paid, the rest can pray’, Financial Times, Monday May 14 2012) “The under-lawyered should look for spiritual, not financial, comfort”.

We are very pleased to announce that Henry Liu is joining our New York office today as a Finance Partner and as leader of the Financial Institutions & Infrastructure Teams for Greater China and Asia.

Henry has enormous reach within business, banking and government in China and is the former general counsel and director general at the China Securities Regulatory Commission.  Henry will provide valuable assistance to the Pillsbury Investment Funds group on the structuring of investment funds in China as well as the movement of capital from China into investment funds outside of China.

“Henry brings a unique combination of experience as a former high-level Chinese government official and as an extremely successful and well-connected attorney for our China practice,” said Pillsbury Firm Chair Jim Rishwain. “Henry is an incredibly rare find, as he can navigate the United States and Chinese business and legal landscapes with ease. Likewise, he has enormous reach within business, banking and government circles in Greater China and has earned the very highest reputation among his colleagues and peers. As a result, he will greatly enhance Pillsbury's stature and presence in Asia – long a key market for our firm and our clients.”

Henry has also served international, Chinese and Asia Pacific clients ranging from Fortune 500 global firms to emerging companies and has been involved in most major types of cross-border corporate and financing transactions and regulatory matters involving Asia and China, across most major industry sectors, in mergers and acquisitions, capital markets, banking and financing, corporate, private equity and investment funds, foreign direct investments, real estate, technology transfers and international trade. He has over his career been exposed to most industries and sectors, including financial services, manufacturing, real estate, transportation, energy, telecom and media, and sports and entertainment.  Henry was previously managing director of investment banking with Donaldson, Lufkin & Jenrette/Credit Suisse First Boston in Hong Kong as well as the chair of a large international law firm’s China practice.