One of our pet peeves is seeing fundraising efforts ignoring the rules on general solicitations.
As a quick primer, most of this type of private capital is raised under the 506(b) exemption to the Securities Act. The details are arcane, but the key is that these funds may not advertise. They cannot put on their public-facing website anything that advertises a new fund or reveals it is fundraising.
Yet you see funds advertised everywhere. This ranges from the blatant websites to more-subtle techniques. A common one is the “we’re proud to announce the first closing of the fund” approach. Check out the search results for “first close” on Techcrunch or Google News and you’ll see even big funds doing this; small, regional, “under the radar” funds do it all the time. But it is not OK.
(This is not just for funds. Private companies raising capital must not publicly disclose they are fundraising either, if they want to keep their 506(b) exemption.)
So if the fund you are evaluating is “publicly soliciting” you should deeply consider the risks for when the SEC comes knocking.
And more widely, remaining compliant with Securities Act rules, Advisor Act rules, state equivalents, and more – not to mention taxes! – is not trivial, and the consequences can be significant. As an investor, you need to be sure the sidecar fund follows the rules – because, if they don’t, ultimately you pay the price.
*Descends soap box*
Sidecars can quickly go along this progression without good compliance – and you don’t want to be the one thrown overboard.
