USA Law and Practice Contributed by: Scott Naidech, Basil Godellas, Olga Loy and Beth Kramer, Winston & Strawn
• performance results of a subset of investments extracted from a portfolio, unless the advertise - ment provides, or offers to provide promptly, the performance results of the total portfolio; • hypothetical performance (which does not include performance generated by interactive analysis tools), unless the adviser adopts and implements policies and procedures reasonably designed to determine that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain information underlying the hypothetical performance; and • predecessor performance, unless there is appro - priate similarity with regard to the personnel and accounts; in addition, the advertising adviser must include all relevant disclosures clearly and promi - nently in the advertisement. Marketing to US State and Local Government Entity Investors Rule 206 (4)-5 under the Advisers Act (the “Pay to Play Rule”) is generally designed to address pay-to- play abuses involving campaign contributions to gov - ernment officials who are in a position to influence the selection of investment advisers to manage gov - ernment client assets, including the assets of public pension funds and other public entities. Among other things, Rule 206 (4)-5 prohibits certain investment advisers from providing investment advisory services for compensation to a government client for two years after the adviser or certain of its executives or employ - ees makes a campaign contribution to certain elected officials or candidates who can influence the selection of certain investment advisers. In soliciting investments from any US state or local government entities, investment advisers should con - sider any applicable US state or local lobbying rules that may apply. 4.5 High Net Worth or Retail Investors Sponsors of private funds are able to raise capital from qualified high net worth investors based on the applicable exemptions under the Investment Compa - ny Act and Securities Act. For private funds structured to rely on the Section 3 (c)(1) exemption of the Invest - ment Company Act, the private fund’s securities can
be held by no more than 100 US beneficial owners (inclusive of certain “anti-pyramiding” look-through rules). For private funds structured to rely on the Sec - tion 3 (c)(7) exemption of the Investment Company Act, the private fund’s securities can be held solely by ultra-high net worth investors that qualify as “quali - fied purchasers” under the Investment Company Act. Sponsors are permitted to form two parallel funds, one 3 (c)(1) private investment fund and the other a 3 (c)(7) qualified purchaser fund, and the two funds are not integrated for purposes of determining qualifica - tion under the applicable exemption. In addition to private funds, registered investment companies (such as mutual funds, exchange-traded funds (or ETFs), closed-end funds, business devel - opment companies (or BDCs), and interval funds) can offer interests to retail investors through regis - tered offerings complying with the Securities Act and Investment Company Act disclosure and prospectus delivery requirements. Once securities are registered and sold (or listed) in a public offering, they are avail - able to retail investors. 4.6 Private Placements Alternative funds are subject to the requirements of the Securities Act concerning private placements of their securities to US persons or via US jurisdictional means. Most funds typically rely on the registration exemption provided by Section 4 (a)(2) of the Securi - ties Act, and the “safe harbour” of Rule 506 under Regulation D under the Securities Act. Sponsors seek - ing to access larger pools of high net worth investors using general solicitations or advertising may consider Rule 506 (c) under Regulation D. Rule 506 (c) allows issuers to offer and sell securities through general solicitation or advertising, provided that all purchasers are accredited investors and the issuer takes reason - able steps to verify each purchaser’s accredited status (beyond simply relying on purchaser representations). Sponsors relying on Rule 506 should be mindful of the authority of US states to enforce their anti-fraud laws and to require notice filings depending on the applicable state securities laws. 4.7 Compensation and Placement Agents Many funds (in particular, private equity funds) will use placement agents to market fund interests. Generally,
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