We are often asked why the public never sees advertisements for hedge funds. It turns out that special rules apply to the marketing of private hedge funds. You see, many hedge funds are exempt from public registration, but one of the prices they pay for that exemption is that they cannot market to the general public. That privilege is bestowed only to public funds, such as mutual funds and investment companies. Exempt hedge funds must live within SEC-imposed marketing restrictions or face loss of their exemption.
There are special rules that apply to exempt hedge funds who wish to have a presence on the Internet. You cannot solicit investors on a website. However, there are certain rules you can follow to allow communication with potential investors. These rules include a 30-day cooling-off period between the time of initial contact and subsequent information exchange. This satisfies the requirement that the investor have a “prior relationship” with the hedge fund in order to access online fund data. All fund data must be password protected and not available to the general public. And don’t even think about promoting a hedge fund on a public forum – the SEC will frown at this.
You can use a broker to distribute information to the broker’s clients even if those clients do not have a prior relationship with the hedge fund. But the broker needs to disclose every possible conflict of interest. All fund information must be complete – don’t even consider omitting the bad news in your fund performance disclosures.
Exempt hedge funds typically raise funding through private placements. There is a whole set of regulations devoted to the use of private placements, and hedge funds must be sure to follow these closely. Many of these regulations deal with defining “qualified investors”, the only people to whom you can market.
If your hedge fund has a good story to tell, it often will disseminate performance information to online reporting services. There are Internet-based services that will distribute your performance numbers to the dozens of reporting sites in exchange for a fee. You must ensure that any site that receives your data is following the SEC rules. The SEC publishes “no-action” letters that basically tell fund managers what they can and cannot do. Look for a reporting service that has a no-action letter in its possession — yow will probably be OK using these sites to distribute performance figures.