Our clients rely on our expertise developing compliant websites. Our websites are designed to be compliant. We provide general guidance and a list of points to consider when speaking with Alternative Funds. We strongly recommend that our clients speak with their compliance and legal professionals before moving forward with any project, including a website. A typical question from a start-up hedge fund is whether they can actually have a website and if so, what is allowed and/or required by the Regulator/SEC. Below, as an example of our guidance, we have included a copy of the "Lamp" No-Action Letter, as it is commonly referred to, a ruling by the SEC which set out all of the elements which a website must contain in order to preserve certain securities exemptions so that the website does not trigger a "public offering" of securities. For example, each user must be an "Accredited or Qualified Investor".
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, NW
Washington, D.C. 20549
FROM: NATALIE S. BEJ
OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT
Telephone Number: (202) 942-0660
Telecopier Number: (202) 942-9659
NOTE: THIS DOCUMENT MAY CONTAIN PRIVILEGED AND NONPUBLIC INFORMATION. IT IS INTENDED ONLY FOR THE USE OF THE INDIVIDUAL OR ENTITY NAMED ABOVE. AND OTHERS WHO SPECIFICALLY HAVE BEEN AUTHORIZED TO RECEIVE IT. If you are not the intended recipient of this facsimile, or the agent responsible for delivering it to the intended recipient, you hereby are notified that any review, dissemination distribution, or copying of this communication strictly is prohibited. If you have received this communication in error, please notify us immediately by telephone and return the original to the above address by regular postal service without making a copy. Thank you for your cooperation.
Our Ref. No. 97-243-CC
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Lamp Technologies, Inc.
DIVISION OF INVESTMENT MANAGEMENT File No.132-3
By letter dated May 6, 1997, you request assurance that the staff would not recommend that the Commission take enforcement action if certain information concerning private investment companies is posted on a website administered by Lamp Technologies, Inc. ("Lamp"), under the circumstances described below. Specifically, you request assurance that the posting of information on the website will not (i) involve any form of general solicitation or general advertising on behalf of a participating fund within the meaning of rule 502(c) of Regulation D under the Securities Act of 1933 ("Securities Act"), (ii) constitute a public offering of securities by a participating fund within the meaning of section 3(c)(1) or section 3(c)(7) of the Investment Company Act of 1940 ("Investment Company Act"), or (iii) cause any investment adviser to a participating fund to be deemed to be holding itself out generally to the public as an investment adviser within the meaning of section 203(b)(3) of the Investment Advisers Act of 1940 ("Advisers Act").
Lamp is engaged in the business of data processing, software development and the creation and maintenance of websites. Lamp proposes to establish and administer a website that will contain information concerning funds excluded from regulation as investment companies pursuant to section 3(c)(1) or section 3(c)(7) of the Investment Company Act and privately offered pursuant to Regulation D under the Securities Act ("private funds"). 1/ You represent that neither Lamp nor any of its affiliates will operate or provide investment advisory services to any of the private funds listed on the site. 2/ The investment advisers
of the private funds listed on the website may be registered under the Advisers Act or they may be exempt from registration pursuant to section 203(b)(3) of the Advisers Act. 3/ You anticipate that managers of the private funds will post both descriptive information (for example, offering memoranda) and performance information relating to the funds on the website. You state that the website is designed to streamline and economize the transmission of private fund information among a select group of industry professionals that in many cases already may have access to such information.
In order to obtain access to the private fund information available on the website, a potential subscriber will be required to (i) complete a questionnaire designed to allow Lamp to form a reasonable basis for determining that the subscriber is an "accredited investor" within the meaning of Securities Act Regulation D who has at least a $2 million investment portfolio, and (ii) pay a subscription fee of approximately $500 per month. You represent that Lamp will not be an agent of any subscriber to the website. Subscribers who have pre-qualified as accredited investors and who have paid the subscription fee will receive a password permitting them access to the private fund information posted on the website. 4/ You also represent that Lamp will require subscribers to agree not to invest in any posted fund (other than funds in which the subscriber or its affiliates already invests, has already been solicited for or is already actively considering an investment in) for 30 days following the subscriber's qualification. You maintain that this waiting period, together with the subscription fee and the fact that most private funds are only available to take subscriptions on a quarterly or annual basis, ensure that subscribers do not join to invest in any particular fund and that the qualification by Lamp of the subscriber, therefore, is not deemed a solicitation for any particular fund.
The Commission has indicated that the placement of private offering materials on a website, without sufficient procedures to limit access to accredited investors, would be inconsistent with the prohibition against general solicitation or advertising in rule 502(c) of Regulation D. 5/ In a no-action letter to IPOnet (pub. avail. July 26, 1996), however, the staff of the Division of Corporation Finance stated that the posting of a notice of a private offering on a website would not be deemed a "general solicitation" or "general advertising" within the meaning of Regulation D when pre-qualification and password-protection procedures designed to limit access to the website were in place. 6/
You maintain that the posting of private fund information on the website and the accessing of such information by pre-qualified subscribers on a password-protected basis would not constitute "general solicitation" or "general advertising" by any participating fund within the meaning of Regulation D. You further maintain that the posting of private fund related information on the website, subject to the same procedures, would not constitute a public offering of securities of any participating fund for purposes of section 3(c)(1) or section 3(c)(7) of the Investment Company Act. You note that, as a general matter, if an offer is public for purposes of the Securities Act, it also would be public for purposes of section 3(c)(1) and, presumably, section 3(c)(7).7/
In addition, you assert that an investment adviser exempt from registration under section 203(b)(3) of the Advisers Act should not, by virtue of posting private fund information on the website subject to the procedures described above, be deemed to be "holding itself out generally to the public as an investment adviser." 8/ You maintain that the website information will not be "publicly available," because access to such information will be limited to a select group of accredited investors through the pre-qualification procedures and password-protection system. You represent that Lamp will require private fund managers to agree to post only private fund related information on the website and to not offer other services (such as advisory services) or products on the site. 9/ You also maintain that the use of the site by unregistered investment advisers is consistent with the safe harbor created by rule 203(b)(3)-1 under the Advisers Act, because the information listed on the site will exclusively concern funds structured as limited partnerships that are privately offered in compliance with Regulation D.10/
Based on the use of procedures designed to limit access to the website information to a select group of accredited investors, we do not believe that the proposed posting of private fund information on the website would constitute a public offering of securities by a participating fund with in the meaning of section 3(c)(l) or section 3(c)(7) of the Investment Company Act. 11/ In addition, based on the use of procedures designed to limit access to the website information to a select group of accredited investors and your representation that Lamp will require private fund managers to agree to post only private fund related information on the website and to not offer other services or products on the site, we do not believe that an investment adviser who posts only private fund information on the website would be "holding itself out generally to the public" as an investment adviser within the meaning of section 203 (b)(3) of the Advisers Act.
We therefore would not recommend that the Commission take enforcement action if Lamp posts information concerning private funds on a website that is password-protected and accessible only to subscribers who are pre-determined by Lamp to be accredited investors. 12/
The Division of Corporation Finance has asked us to inform you that the qualification of accredited investors in the manner described and the posting of a notice concerning a private fund on a website that is password-protected and accessible only to subscribers who are pre-determined by Lamp to be accredited investors would not involve a "general solicitation" or "general advertising" within the meaning of rule 502(c) of Securities Act Regulation D. In reaching this conclusion , the Division notes that (i) both the invitation to complete the questionnaire used to determine whether an investor is accredited and the questionnaire itself will be generic in nature and will not reference any specific funds posted or to be posted on the password-protected website; (ii) the password-protected website will be available to a particular investor only after Lamp has made the determination that the particular potential investor is accredited; and (iii) a potential investor may purchase securities only after the waiting period described in your letter. In this regard, the Division takes no position as to whether the information obtained by Lamp is sufficient to form a reasonable basis for believing an investor to be accredited.
These positions are based on the facts and circumstances set forth in your letter. Any different facts or circumstances may require a different conclusion. 13/
Natalie S. Bej
1/ Section 3(c)(l) excepts from the definition of investment company any issuer
(i) whose outstanding securities (other than short-term paper) are beneficially owned by not more than 100 persons, and (ii) that is not making and does not presently propose to make a public offering of its securities. Section 3(c)(7) excepts from the definition of investment company any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are "qualified purchasers" (as defined in section 2(a)(51) of the Act), and which is not making and does not at that time propose to make a public offering of such securities.
2/ You also represent that Lamp is not a broker-dealer or affiliated with a broker-dealer, no employee of Lamp is a registered representative of a broker-dealer, and Lamp, its affiliates and their employees will not in connection with the website be involved in effecting transactions in securities or assisting participants by negotiating transactions in securities. You are not seeking assurance as to whether Lamp is required to be registered as an investment adviser or broker-dealer in relation to the site. Because Lamp's activities could raise issues concerning broker-dealer registration, the Division of Market Regulation has asked us to inform you that the representations made in Venture Listing Services, Inc. (pub. avail. June 15,1994) appear to be relevant to the proposed activities.
3/ Section 203(b)(3), in relevant part, provides an exemption from registration for any investment adviser who during the preceding 12 months had fewer than 15 clients, and who neither holds himself out generally to the public as an investment adviser nor acts as an investment adviser to any registered investment company.
4/ You represent that private funds posted on the website and their managers will not be given automatic access to the site by virtue of being included in the database, but will be required to follow the normal subscription procedure and pay the subscription fee. Moreover, subscribers must agree not to deliver private fund information posted on the website to anyone other than the subscriber's authorized personnel and its professional advisers.
5/ See Use of Electronic Media for Delivery Purposes, Securities Act Release No.7233 (Oct. 6, 1995).The Commission has requested comment whether the general solicitation prohibitions should be relaxed for certain Regulation D offerings or sales to qualified purchasers. See Securities Act Concepts and Their Effects on Capital Formation, Securities Act Release No.7314 (July 31, 1996) at text accompanying note 66.
6/ You note that, to ensure that the qualification of a subscriber would not be deemed a solicitation for a particular offering, the IPOnet letter required that subscribers not be permitted to participate in an offering that was posted on the website prior to the investor's qualification You maintain that this procedure is not practical in the case of private fund offerings, which are made on a semi-continuous basis (quarterly or annually). You therefore propose the 30-day waiting period described above to ensure that subscribers do not join to invest in any particular private fund.
7/ See, e.g., Gerard Rizzuti (pub. avail. June 7, 1983).
8/ The Commission has stated that an adviser who uses a publicly available electronic medium such as a website to provide information about its services would not qualify for the exemption from registration provided by section 203(b)(3) of the Advisers Act. See Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information, Securities Act Release No.7288 (May 9, 1996), at text following note 32 (an investment adviser that advertises using electronic media will be deemed to have offered its services to the public).
9/ Cf. Munder Capital Management (pub. avail. May 17, 1996) (mutual fund related documents available on a website are not advertisements for the adviser's advisory services unless they are "designed to maintain existing clients or solicit new clients for the adviser").
10/ Rule 203(b)(3)-l(c) provides that an investment adviser relying on the rule shall not be deemed to be holding itself out generally to the public as an investment adviser, within the meaning of section 203(b})(3), solely because it participates in a non-public offering of limited partnership interests under the Securities Act.
11/ We note that, while access to the website would be limited to accredited investors, section 3(c)(7) funds would be required to limit sales of securities to "qualified purchasers," as defined in section 2(a)(5l) of the Act.
12/ We note that there may be other, equally effective, procedures designed to restrict access to website information that would not cause a private fund to be unable to rely on section 3(c)(l) or section 3(c)(7) of the Investment Company Act or a private fund manager to be unable to rely on section 203(b)(3) of the Advisers Act.
13/ We take this opportunity to express our view that we also would not object if similar screening procedures were used by the publisher of a private fund directory distributed in paper, rather than electronic, format.