In the last week, there have been two huge wins for the investment management industry from a marketing perspective.

Public Marketing of Private Funds: First, the SEC released no-action guidance providing clarity to issuers relying on Rule 506(c) of Regulation D, an exemption from securities registration that permits issuers to publicly advertise an offering, provided they take reasonable steps to verify investor accreditation. Many issuers have been reluctant to rely on Rule 506(c) because of the burdensome steps associated with the verification requirements (which would include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and third-party verification letters). Now, pursuant to the new guidance, issuers relying on Rule 506(c) can satisfy the verification requirement through an investor’s self-certification if the investor meets certain investment minimums ($200,000 for natural persons and $1 million for entities) and the issuer obtains written representations that the purchaser's minimum investment is not financed in whole or in part by any third party. We expect many managers will quickly react to this guidance, and after amending offering documents and Form Ds as needed, start to engage in general solicitation of their private fund offerings.

It is worth noting that marketing materials of an SEC registered investment adviser will still be subject to the “Marketing Rule,” Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended. This means, among other things, that materials including hypothetical performance (e.g., target returns) may only be shared in compliance with a firm’s policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement (e.g., targeted returns cannot be generally advertised on a public website).

Advertising Gross Performance: Second, the SEC released new FAQs related to the Marketing Rule. Of particular interest to our clients, the SEC wrote that it would not recommend enforcement action to the Commission under rule 206(4)-1(d)(1) if an adviser displays the gross performance of an extract in an advertisement without including corresponding net performance of the extract, if, among other things, it is accompanied by the total portfolio’s gross and net performance consistent with the requirements of the Marketing Rule.

Prior to the release of this FAQ, if an adviser showed the gross performance of an extract in an advertisement, the Marketing Rule required the adviser to also show the net performance of such extract in the advertisement, which for managers of private assets, was particularly difficult.

In what appears to be a shift toward a business-friendly regulatory regime, the SEC also provided similar guidance with respect to whether certain characteristics (e.g., yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analyses, the Sharpe ratio, the Sortino ratio, and other similar metrics) are “performance” under the rule. The FAQ notes that calculating these characteristics net of fees and expenses may be impossible or lead to misleading or confusing results and so the SEC concluded that, when an adviser prominently displays the gross and net performance of the total portfolio calculated pursuant to the requirements of the Marketing Rule and presented in a manner that is not otherwise materially misleading, and provides appropriate accompanying information about the characteristic and how it is calculated, there is little risk that prospective clients and prospective investors will be misled about the impact of fees and expenses on their returns when viewing such a characteristic.

We are excited for our clients and are available should you wish to discuss and take action in light of this regulatory shift!