NORTH AMERICA - US fund managers have suggested 'know your investor' rules likely to come into force with the lifting of restrictions on marketing private funds could make capital raising more difficult.
Fund managers have broadly welcomed a provision in the recent JOBS Act that will lift a prohibition on fund managers marketing to institutional and high net worth investors without an IPO.
But responses to an ongoing consultation launched by the SEC, the US financial regulator, suggest the reform of Rule 506 could place even more onerous requirements on fund managers to verify whether would-be investors are in fact accredited.
In its submission, the North American Securities Administrators Association recommended tightening up the current self-certification procedure, with accredited investors required to provide multiple layers of documentation.
Yet Michael Flannigan, CFO at investment bank BrokerBank, said this would act as a deterrent to potential investors in smaller funds.
"Not accepting only self certification will without question make raising capital for small business through private placements much more difficult due to the reluctance on the part of many potential investors to go to the trouble of assembling this information or, for that matter, to disclose it to anyone," he told the SEC.
The Real Estate Investment Securities Association (REISA) has also weighed into the consultation, urging the SEC not to interpret the JOBS Act's "reasonable steps to verify" in a way that is "overly burdensome".
Meanwhile, the Managed Funds Association urged the regulator to model the verification requirement on a subscription document commonly used by hedge funds, adding that the primary verification method should continue to be self-certification.
Both REISA and Michael Scillia, director of the US National Investment Banking Association, argued that private managers with no intention of promoting their funds should be exempt from the requirement to verify investors are accredited.
According to Scillia, the verification should otherwise comprise straightforward confirmation from "any one of a multitude" of specialist due diligence firms, but would stop short of providing investor information beyond confirmation that they are accredited.
Because the JOBS Act omits any reference to safe harbour provision, another concern for the industry is a potential penalty if they inadvertently market to a non-accredited investor.
Daniel Oschin, president at REISA, told the SEC: "Without a safe harbour, many issuers may avoid using general solicitation for fear of losing their exemption from registration and being subject to other regulatory sanctions as a result of unintentionally selling securities to a non-accredited investor."
However, state authorities from Ohio and Massachusetts have both raised concerns that relaxation of Rule 506 could result in failure to protect vulnerable retail investors.
In his submission to the SEC, Massachusetts Commonwealth secretary William Galvin urged that the definition of accredited investor be "strengthened and improved" to deter what he described as "Wild West marketing campaigns".