PRIVATE EQUITY - Morgan Lewis

11 Tangled webGPs should scrupulouslymanage web content

14 Crossover sensationCrosslink Capital complies inpublic and private markets

30 Changing course inFrench watersTurnaround investing inFrance is fraught withregulatory hurdles

19 Hot zonesPrivate equity firmsface loomingregulatory issuesaround the world

26 Solicit awayThe SEC is ponderingchanges toRegulation D

THE GLOBAL JOURNAL FOR PRIVATE EQUITYCFOs AND COOs

September 2006 | Volume 3, Issue 9

A PRIVATE EQUITY INTERNATIONAL PUBLICATION

PRIVATEMANAGERwww.privateequitymanager.com

EQUITY

Focus: Regulatory & complianceALSO

4 Consolidated accounting

5 English LP evolution

7 Lobbying with the big boys

8 Copycat competition

9 Paul Capital’s new frontier

10 Promoting the mission

16 Barbarian representation

17 SHUAA Capital’s Gary Feulner

32 AIM attraction

34 Statshot: Paid in the UK

35 Dialogue: Gwyneth Ketterer

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EQUITY

2 PRIVATE EQUITY MANAGER SEPTEMBER 2006 COPYING WITHOUT PERMISSION FROM PRIVATE EQUITY MANAGER IS UNLAWFUL.

INDEXOF COMPANIES

INDEXOF COMPANIES

EDITOR DAVID SNOW

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PrivateEquityManager.com invites you to visit KnowledgeBase, our searchable intellectual-cap-ital archive. KnowledgeBase, found on PrivateEquityManager.com, is only available to PrivateEquity Manager subscribers. KnowledgeBase brings together PDF versions of proprietary arti-cles with papers on relevant themes from specialists from all over the world. Recent additionsto KnowledgeBase include:

Q&A with Sarah Corr, CalPERS – Sarah Corr explains how the new California publicrecords law is lessening GPs' fears of FOIA requests.

Managing complexity – Ray Maxwell of Invesco Private Capital explains the data collec-tion complexities facing fund of funds managers.

Small is beautiful – Connie Helyar of International Private Equity Services says one of thesecrets to success in private equity fund administration is to keep things small and personal.

Aberdeen Asset Managers 8Abu Dhabi InvestmentAuthority 10Accel-KKR 7AIG Capital Partners 9Alchemy Partners 24AlpInvest Partners 9AP Alternative Assets 10Apollo Management 7, 10Bank of America 14Barclays Capital 12Bear Stearns 35Blackstone Group 7BNP Paribas 13BVCA 5, 24Cahill Gordon 16Campbell Lutyens 12Capital Z 7Caravelle 31Carl Marks & Co 10Carlyle Group 7, 8CDC 5Cerberus 8, 12CIBC World Markets 12CIT Group 13Citigroup, 8Clarion Lion PropertiesFund 8Clifford Chance 12, 17CMBOR 8CMF Associates 12Cogent Partners 13Cowen 13Crosslink Capital 1, 3, 14, 15Debevoise & Plimpton 5, 10Deloitte Touche Tohmatsu 25Demica 12, 13

DLA Piper 17, 23, 24Dubai International 8EMPEA 9Equifin Capital Partners 7Ernst & Young 13, 14, 15EVCA 4Evercore Partners 7Festus & Helen Stacy Foun-dation 5Fish & Richardson 16, 33Fried Frank 16GIMV 4Glazer Family 8GoldenTree 8Goldman Sachs 12, 13Helix 12Isthimar 8JM Huber 13JP Morgan 7, 12, 15Kirkland & Ellis 17Kohlberg Kravis Roberts 7,8, 10, 16, 19Lehman Brothers 7Lone Star 8, 19, 26Macquarie 8Marsh & McLennan 12McKinsey 13Mergermarket 34Merrill Lynch 5, 12, 16Milbank, Tweed 26Monument Group 12Morgan, Lewis 29North Castle Partners 10Northern Trust 12, 13Omega Ventures 14O'Melveny & Myers 25Paul Capital Partners 9

Paul Hastings 16Piper Jaffray 13Preston Gates & Ellis 7PricewaterhouseCoopers 13Proskauer Rose 16Quadrangle 15Ripplewood Holdings 19Ropes & Gray 22Rosedale Capital 12Royal Bank of Scotland 7SG Capital 30SHUAA Capital 1, 17Simpson Thacher 16Sullivan & Cromwell 16Summit Partners 15Texas Pacific Group 7TH Lee Putnam Ventures 5UBS 12Weil, Gotshal & Manges 11Welsh Carson 10White & Case 16, 17Willkie Farr 31Wilson Sonsini 27

28 PRIVATE EQUITY MANAGER SEPTEMBER 2006

Fending for themselvesIn the opinion by the SEC's general counsel released in 1935, theSEC provided several factors to be used in determiningwhether an offering was public or private: (i) the manner ofthe offering, (ii) the size of the offering, (iii) the number of offer-ees, (iv) the relationship of the offerees to each other and tothe issuer, and (v) the number of units offered in the offering.The release effectively set forth that an offering to not morethan 25 persons did not involve a public offering. In SEC v. Ral-ston Purina Co. decided by the Supreme Court in 1953, theSupreme Court addressing the issuance of stock to a broadbased group of Ralston Purina's employees focused not on thenumber of offerees as an objective test but on whether the"particular class of persons affected needs the protection ofthe Act" and whether they could "fend for themselves," under-scoring the importance of the offeree's capabilities and not thecharacteristics of the offering itself.

The SEC and courts have tended to focus since the RalstonPurina ruling on numerous factors in determining whether anoffering is nonpublic including: (i) the number of offerees(although the number of prospective investors alone is notgenerally dispositive of the existence of general solicitation andadvertising), (ii) pre-existing substantive relationshipsbetween the issuer and the offeree, (iii) the sophistication ofthe prospective investors and (iv) other factors relating to thenature, scope, type and manner of the offering. Rules 505 and506 of Regulation D, which establish safe harbor criteria for theprivate offering exemption, also prohibit general solicitationunder all instances while Rule 502 addresses the specific formof restrictions on the manner of offering interests. Rule 502(c)states "[n]either the issuer nor any person acting on its behalfshall offer or sell the securities by any form of general solicita-tion or general advertising, including, but not limited to, the fol-lowing: (1) Any advertisement, article, notice or other commu-nication published in any newspaper, magazine, or similarmedia or broadcast over television or radio; and (2) Any sem-inar, or meeting whose attendees have been invited by anygeneral solicitation or general advertising."

Blast email communications, blind mail distributions, pressreleases and interviews and unrestricted websites are all cov-ered by 502(c).

Despite numerous no-action letters, SEC releases andenforcement actions and court rulings over the years, the legalframework surrounding the ban on general solicitation has notprovided meaningful objective guidance with regard to thedetermination of what constitutes solicitation and as a resulthas left the private fund issuer continuing to tread in a murkypool. What is clear through interpretative evolution is the tenetthat all prospective investors who are the subjects of solicita-tion must have a preexisting substantive relationship with the

For many years, restrictions on general solicitation and gener-al advertising in connection with private offerings exempt fromregistration under the US Securities Act of 1933, as amended,as well as under the "safe harbor" exemptions of Regulation D,have created difficulties for private investment fund sponsorsand their broker-dealer agents seeking to raise capital fromprospective investors.

The lack of clearly understood bright-line tests in additionto well defined guidelines and criteria relating to numerousissues surrounding the bans on solicitation and advertisinghave restricted private investment fund sponsors from devel-oping more widespread capital raising techniques and reach-ing a broader sophisticated investor audience. Such restric-tions have prevented the industry from evolving in step withmodern technologies and capabilities. For example, the tradi-tional investment fund industry has over the last fifteen yearsbeen generally sidelined while unprecedented leaps in techno-logical advancement through the Internet has occurred, curb-ing the industry's potential for global retail reach.

Many recent questions have been raised by the Securitiesand Exchange Commission in addition to industry participantsover the past several years questioning the efficacy of the exist-ing bans on general solicitation and advertising - from the SEC'shedge fund report in September 2003, the "Implications of theGrowth of Hedge Funds," to the Final Report of the AdvisoryCommittee on Smaller Public Companies in April of this year.

The issue of general solicitation and advertising is relevantin Section 4(2) of the Securities Act, the "private placement"exemption which exempts certain transactions from registra-tion by an issuer "not involving any public offering." A privateinvestment fund sponsor engaged in a private placement offund interests in the United States can either rely on Section4(2) or in the alternative rely on the "safe harbor" private place-ment offering rules of Regulation D of the Securities Act.Although the bans are evident within the law and interpreta-tions, the criteria for determining what constitutes solicitationis less evident and often left to subjective analysis.

In the twilight ofliberalizationRestrictions on general solicitation andadvertising in private equity have stifledthe industry's evolution. But the SECappears to be setting the stage forchange. By Jedd Wider

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REGULATORY

the Securities Act (e.g. name of the issuer, thetitle, amount, basic terms, time of offering,statement of the manner and purpose of theoffering, etc.).

The SEC in its "Implications of the Growthof Hedge Funds" also questioned whether therestrictions on general solicitation for privateofferings of interests in funds relying on Sec-tion 3(c)(7) of the Investment Company Actof 1940 should be retained where all investors

were required to be "qualified purchasers." Although acknowl-edging that they would not eliminate the prohibition withrespect to Section 3(c)(1) funds relying on the minimumaccredited investor accreditation threshold because it could"increase the level of risk of investment interest by less wealthyinvestors," the SEC confirmed that easing the prohibition ongeneral solicitation with respect to "qualified purchaser" fundscould promote capital formation without raising "significantinvestor protection concerns."

SEC Chairman Christopher Cox recently announced thatthe SEC, in the wake of its decision not to appeal the US Courtof Appeals for the District of Columbia Circuit's decision in theGoldstein case vacating the SEC's recent investment adviserrules on June 23rd, would focus on potentially increasing theaccreditation threshold for "accredited investors" from theexisting $1 million net worth test for individuals. It's not clearwhether such announcement is the laying of necessarygroundwork for modification to the general solicitation restric-tions under the Securities Act or simply an acceleratedresponse to the Goldstein Court's decision to protect furtherretailization.

One thing is clear however - regulatory agency reaction inaddition to industry support for such modifications to the gen-eral solicitation and advertising bans continue to be heard onthis point. Additionally, increased attention on the need tomodify the bans by focusing on the nature of the investor andnot the nature of the offering is setting the stage for futurechange. The proposed modifications by the SEC's AdvisoryCommittee will enable private fund sponsors and agents toreach a broader retail market and provide for greater poten-tial opportunities for capital raising by protecting the needs ofinvestors who require protection - those who don't qualify asqualified purchasers or accredited investors under the pro-posed accreditation changes. Why focus on those prospectiveinvestors being solicited as opposed to the actual investorsinvesting? After all, as the Advisory Committee captured it wellin its April report, "no offeree has ever lost any money unlesshe or she became a purchaser."Jedd Wider is a partner in the Private Investment Funds Groupof Morgan, Lewis & Bockius LLP

issuer in order to avoid qualifying as generalsolicitation under Regulation D. Typically, suit-ability questionnaires distributed to prospec-tive investors prior to an offering that providea private fund sponsor with sufficient informa-tion in order to analyze a prospective investor'sfinancial sophistication and capabilities is suf-ficient. The determination of the existence orabsence of a general solicitation however isbased on the factual circumstances of eachcase. The consequences of failing to navigate the blurry linetests are nothing short of draconian - full rescission by one'sexisting investors as well as potential fines. With the stakeshigh, the question raised is, does the regulatory frameworksupporting the ban on general solicitation require revampingtoday?

The SEC's Advisory Committee on Smaller Public Compa-nies in April of this year called for liberalizing the "manner ofoffering" restrictions related to general solicitation and adver-tising based on the principal rationale that attention to avoid-ing general solicitation and advertising has the effect of "focus-ing a disproportionate amount of time and effort on personswho may never purchase securities - rather than on the actu-al investors and their need for protection…"

Aside from the difficulties of being able to determinewhether an offering violated the bans on general solicitationand advertising, the Advisory Committee believed that thebans prohibited issuers from taking advantage of the Internetto reach potential investors who did not need the protection ofthe Securities Act - a significant impediment to capital raising.The Advisory Committee called for the adoption of a new pri-vate offering exemption that would in effect allow sales to eli-gible investors who don't require the full protections affordedthe Securities Act because of several factors including: (i) theinvestor's financial wherewithal, (ii) investment sophistication,(iii) relationship to the issuer, or (iv) institutional status, regard-less of how the prospective investors were contacted.

The Advisory Committee recommended determining thefinancial wherewithal of a natural person through an incomeor net worth test similar to the existing accredited investoraccreditation thresholds set forth in Regulation D but withincreases to both, e.g. $2 million in joint net worth (increasedfrom $1 million), or $300,000 in annual income or $400,000of joint annual income (increased from $200,000 or $300,000jointly). Additionally, the Advisory Committee, among otherthings, recommended that in order to avoid abuses, all solici-tations made by mass media such as newspapers, mass mail-ings, magazines or the Internet would be restricted to the basicinformation regarding the issuer as proscribed in Rule 135(c) of

SEPTEMBER 2006 PRIVATE EQUITY MANAGER 29COPYING WITHOUT PERMISSION FROM PRIVATE EQUITY MANAGER IS UNLAWFUL.

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Wider: Reg D may change

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PRIVATE EQUITY - Morgan Lewis