Hedge Funds Ask SEC to Limit Liability in Solicitation Rule

The Hedge Fund Association—which represents investors, hedge funds and service providers— has asked the Securities and Exchange Commission to specifically tell private fund managers what they will need to do to safely verify whether investors are accredited once a new rule allowing solicitation and advertising of private funds is finalized.

Last month, the SEC approved a proposed rule to eliminate the current prohibition against general solicitation and advertising for private securities offerings. The proposed exemptions, mandated by the JOBS Act, focus on offerings conducted under Rule 506 of Regulation D. The elimination of the prohibition, as well as a similar one contained in Rule 144A of the Securities Act, permits general solicitation as long as issuers “take reasonable steps to verify” that all of the purchasers are accredited investors.

Concerns have been voiced that the guidance thus far for screening accredited investors is overly broad. In a comment letter to the SEC on Thursday, the HFA lauded its “good intent” regarding proposed standards for verifying investor accreditation,but proposed that the end result might go against the original intent of the JOBS Act, “to increase employment by making it simpler for private companies to raise money from investors.”

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