Select Page


It is important for hedge fund managers to fully understand the breadth of Regulation D’s
prohibition on general solicitation or general advertising. Basically, the prohibition broadly
applies to all contacts with prospective investors concerning a private placement of securities. In
plain English—the general solicitation prohibition may come into play whenever any such contact is
made with any person in the absence of a pre-existing, substantive relationship.


“Pre-existing” Relationship
A “pre-existing” relationship is one that the hedge fund manager has formed with a prospective
investor prior to the “offer.” Alternatively, it may be a pre-existing relationship that was
established through an intermediary—i.e., a person acting on the hedge fund manager’s behalf
(typically, a broker-dealer, solicitor, pension consultant or another investment adviser) prior to
such intermediary participating in the offering.
“Substantive” Relationship

To qualify as a “substantive” relationship, the relationship must be sufficient to show that the
hedge fund manager had adequate knowledge of the prospective investor’s financial circumstances and
sophistication to establish that he or she is an eligible investor for the offering. The
relationship does not have to fit a particular form, nor is it required to be for a particular
duration. It does not have to be a contract or an account relationship. Any relationship where the
hedge fund manager (or a person acting on its behalf) becomes aware of the prospective offeree’s
financial status should be sufficient.
The following summary covers some of the most common situations that hedge fund managers may find
themselves in:

The Do’s
DO limit solicitations to persons with whom you (or your agent) has a pre-existing, substantive
relationship. Such a relationship exists where you have been in contact with the prospective
investor for at least thirty (30) days before offering a specific investment opportunity and you
information regarding the potential offeree’s sophistication and financial circumstances.
DO develop scripted responses to unsolicited inquiries. The standard response to all unsolicited
inquiries should be as follows: “This is a private placement only for qualified purchasers who are
known to us or to one of our placement agents. We cannot send our offering documents in response to
unsolicited inquiries. Thank you for your interest in us.”

DO keep strict control over the dissemination of offering materials. Fund managers should number
their private placement offering memoranda and keep a list of who receives them. Any memoranda
given out to other industry professionals for their informational use should be prominently marked

The Don’ts
Don’t use mass communication methods to advertise fund investment opportunities. Prohibited methods
include newspapers, magazines, radio or television broadcasts, trade magazine coverage, mass
mailings and “cold calling.” Be especially careful when speaking with the press. It is very
important that every conversation with a reporter begins and ends with a statement that, while you
would like to be cooperative, the securities laws prohibit any discussion that might lead to
publicity. When dealing with the press, the rule of thumb is this: If you are not dealing with
reputable reporters whom you personally know, you cannot count on anything being reported correctly
and it is probably safer not to talk to at all.

Don’t speak at industry seminars and events about your fund offering. Such appearances, while
tempting, can lead to inadvertent statements about your fundraising which may be construed as
implied offers or as efforts to prime the audience.

Don’t make generalized, unsolicited offers to investors. Examples of such communications include
letters to officers and directors of public companies, Rolls-Royce owners or physicians in a
particularly upscale geographic area. Even in situations where the fund manager could reasonably
expect the prospective offerees to be qualified investors, the SEC staff has tended to find such
communications, and other forms of cold-calling, to be general solicitations.

Don’t engage unregistered “finders” to locate investors in the United States. Anyone who receives
compensation for introducing a fund manager to investors in the United States (or otherwise to U.S.
persons) when such compensation (or “finder’s fee”) is based on the amount of the investor’s
commitment is acting as a broker-dealer and must be registered as one.


1. The most important thing to remember when using the Internet is to use password protection to
prevent non-accredited investors from accessing information about your fund on your website. All
fund offering documents must be behind a password protected splash page.

The SEC has approved arrangements where a website provides information regarding exempt hedge fund
offerings but only where the issuer has first established a substantive relationship through the
use of an online questionnaire. The password should never be issued to the prospective investor
until after the fund manager has reviewed the investor’s responses on the online questionnaire and
verified his or her qualifications.

Remember, the existence of a substantive relationship, by itself, is not enough to satisfy
Regulation D. The fund manager also must satisfy the pre-existing relationship test. To establish
an appropriate pre-existing relationship in this context, the fund manager should wait at least
thirty days before any sale of interests is consummated—that is, at least thirty days should elapse
between the issuance of the password and the sale of an interest in the fund.

2. Ensure that the website does not contain any reference to fund raising or to investor returns or
other materials. These could be construed as priming the market (a potential violation of
Regulation D) and be considered performance “advertising.”


Sales of fund interests to unqualified investors is a violation of the securities laws:
specifically, a violation of Regulation D. Such violations can result in rescission rights and
other sanctions imposed by federal and state securities regulators. In plain English, a fund
manager may as well give investors the right to “put” his or her investment back to the fund (at
cost) if the manager does not scrupulously follow these do’s and don’ts.

* * * *

This newsletter is published as a source of information only for clients and friends of The
Securities Law Group and should not be construed as legal advice or opinion on any specific facts
or circumstances. The delivery of this publication is not intended to create, and receipt of it
does not create, an attorney-client relationship.

The Securities Law Group
James Grand