CFTC Issues Guidance to Exempt CPOs Seeking to Generally Solicit

Simon Riveles Uncategorized

By Matt McCullough and Eugene Schlesinger

On September 9, the Commodity Futures Trading Commission (CFTC) issued CFTC Letter No. 14-116 in response to requests that it harmonize its regulations with Rule 506(c)’s general solicitation provision. Rule 506(c) lifted the prohibition on issuers, including hedge fund managers, from engaging in “general solicitation.” General solicitation includes advertisements in periodicals, on television, radio or public websites, and seminars or presentations where attendees have been invited by general solicitation or general advertising. Issuers engaging in general solicitation may only sell interests to “accredited investors” and are required to take reasonable steps to verify each investor’s accredited status.

Commodity pool operators (CPOs), exempt from registration under Regulation 4.13(a)(3), however, were barred from general solicitation by 4.13(a)(3)(i), which prevented exempt CPOs from “marketing [interests] to the public in the United States.” CPOs were thus left with the choice of having to register or forego the benefits of Rule 506(c). Following the CFTC’s release, CPOs exempt under 4.13(a)(3) are permitted to generally solicit, provided each pool participant is an accredited investor and the CPO has complied with 506(c)’s accreditation verification requirements. (CPOs who generally solicit may no longer offer interests to knowledgeable employees, unless such employees are also accredited.) CPOs exempt from registration under 4.13(a)(1) are still prohibited from general solicitation because the release did not relax the prohibition on pool advertising contained in 4.13.(a)(1)(iv).

To avail itself of this relief, a CPO must make a notice filing with the CFTC’s Division of Swap Dealer and Intermediary Oversight. Such notices must provide: (1) the name, address, and phone number of the CPO claiming the exemption; (2) the name of the pool; and (3) a representation that pool participants meet accreditation standards.

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