Its A Thin Blue Line (Photo credit: Glyn Lowe Photoworks)
The hedge fund world has always walked a fine line when it comes to attracting new investors. And nowhere has this line been thinner than the one between "finders" and "solicitors" -- the parties who act as the middlemen in the investor location process.
According to SEC rules, a "finder" can act on behalf of a fund to simply locate investors and introduce them to fund management without having to register as a broker-dealer, because by only being an "introducer", they are not engaged in the business of effecting securities transactions. A "solicitor" on the other hand, may provide additional information and advice to an investor, such as offering documents, due diligence materials and fund performance information, and therefore has crossed over the line to effecting a securities transaction and requires registration as a broker-dealer (or association with one). A major recent enforcement action by the SEC against Ranieri Parnters LLC, one of its senior partners, and a "finder" who was found to have crossed over the line to "solictor" outlines the state of these rules at the current time.
This sounds simple enough, but in real life it may be hard to define roles and limit communications. In particular, once the JOBS Act rules are put in place which would allow general solicitations and advertising of private placements, there may be confusion as to the source of information investors have received. Did the investor's private placement memorandum come from the "finder" or the firm's website? Did the investor's information on fund performance comes from the "solicitor" or the manager's talk at a recent conference? We foresee the need for these types of issues to be addressed in the future.
We will continue to monitor developments in this area. In the meantime, for further detail on how the line was crossed in the Ranieri case, please see the SEC's Order at http://www.sec.gov/litigation/admin/2013/34-69091.pdf
