Recently, the SEC settled another administrative proceeding under the Advisers Act's Marketing Rule. This time, the SEC focused on advertisements that a hedge fund sponsor made to prospective investors. The hedge fund's strategy focused on publicly-traded technology stocks, and according to a 2019 Wall Street Journal article, there was a particular focus on pre-IPO financings and making those opportunities available to family offices and high net worth individuals, using connections that the sponsor's founder formed at BlackRock.

The sponsor advertised this strategy and fund through pitch decks and fact sheets. In soliciting prospective investors, the sponsor used a data room and would also attach these pitch decks and fact sheets to emails with prospective clients.

The pitch deck advertising this fund included the performance of the fund. However, the performance of the fund was measured by a single investor's returns, which at times was significantly higher than the overall fund's performance. Some investors in the fund were disqualified from participating in IPO allocations because of FINRA rules, so those opportunities were not allocated to all investor's capital accounts. Thus, the “Fund Overview” performance chart in the pitch deck did not necessarily represent the actual returns of the fund and strategy.

Substantively under the Marketing Rule, this raises significant issues. A major focus of the Marketing Rule is the presentation of an investment adviser's performance. Many specific provisions of the Marketing Rule address how past performance can be presented in advertisements. So, it is not surprising that this performance presentation would draw scrutiny under the Marketing Rule.

It is, however, interesting to note how the SEC is enforcing the Marketing Rule in the funds context. during the Marketing Rule rulemaking process, many private fund advisers requested that the SEC draw bright lines as to what materials would be considered an “advertisement” for purposes of the Marketing Rule. The SEC declined. In the release adopting the final Marketing Rule, the SEC stated, “[I]nformation included in a [private placement memorandum] about the material terms, objectives, and risks of a fund offering is not an advertisement of the adviser. … However, pitch books or other materials accompanying [private placement memoranda] could fall within the definition of an advertisement.” So, private fund sponsors were left with some level of uncertainty about what materials the SEC would or would not view as an “advertisement.”

This enforcement action begins to show us what the SEC will consider an “advertisement” in the private fund space. Pitch decks, performance data, and similar information will likely be considered an “advertisement” under the Marketing Rule. Private fund advisers should review their information materials on their funds to ensure compliance with the Marketing Rule. And, best practices would be to limit the presentation of these informational/marketing materials outside of an investor portal or other secure data room that contains a full PPM with the appropriate footnotes, disclosures, and limitations of the information, including the performance presentation, included in the pitch deck. We will watch as the SEC continues to bring enforcement actions that explain the Marketing Rule and its real world applications.

When advertising the Fund’s performance in these materials, Twenty Acre presented performance returns that were experienced by a single limited partner that had invested in the Fund at inception and was eligible for all Fund investments. This investor’s performance was presented to prospective investors as the Fund’s performance. The investor’s performance, at times, differed substantially from, and was significantly higher than, the Fund’s performance, because certain successful IPO investments the Fund had made were credited to the investor’s capital account in greater proportion than other investors’ capital accounts. These other investors in the Fund, due to investment restrictions under FINRA Rules 5130 and 5131, were unable to participate fully in the IPO investments.

www.sec.gov/...