While looking through the various restrictions on advertising for investment advisers, I was struck by how they fail to address the operations of private equity funds. The Securities and Exchange Commission effectively banned advertising by investment advisers for decades. As reality came, the SEC relented, subject to strict restrictions. In this post-Dodd-Frank world with private equity funds, the advertising restrictions are tough to navigate for private equity funds and their portfolio companies.
Private equity funds are dealing with two different regulatory schemes. The restrictions under the Investment Advisers Act apply all the time, while the restrictions under the Securities Act will apply during fundraising.
The issue is drawing the line between advertising for the fund manager and advertising for the portfolio company. The same is true for private equity real estate funds, in which case the real estate asset is the portfolio company.
A soup company should be able to advertise its soup. This should be true regardless of its ownership structure, whether it is a public company, a private company, or owned by a private equity fund. The soup company can only advertise securities issued by the company in accordance with the securities laws.
I have not found much in the Investment Advisers Act to address this circumstance. That the ownership of the soup company is controlled by an firm regulated under the Investment Advisers Act should not affect its ability to advertise soup.
If the soup is real estate, the firm should be able to advertise its buildings. The ownership structure of real estate should not affect its ability to let the general public that the building is for sale, that space is available or that some new renovations have transformed the building.
The problem begins when you try to draw the line between an advertising for the soup and an advertising for the securities. It’s not a bright line. I’m sure you can imagine ads all along the line going from soup to securities.
That has lead me to look at the SEC limitations around gun-jumping. Under Section 5(c) of the Securities Act, it’s unlawful to make solicitations or offers for the sale of securities prior to the filing of a registration statement. There is a large body of law on what constitutes pre-filing publicity. This is a large body of law in which I have no expertise.
I plan to spend the next few days exploring the area of gun-jumping to see if I can find some ways to determine when a private equity firm is advertising the soup or advertising the securities.
