HEDGE FUNDS
LAWS FOR ADVISERS & FUNDS: COMPLIANCE ISSUES

Posting Data On Web sites

Regulatory Background
The SEC’s rules and regulations related to posting your fund’s information on Web sites are summarized here. This document refers to a large number of no-action rulings that have been issued over the years by the SEC. The sum of all that data represents the SEC’s current position on these matters.

There is a concern about posting your fund’s information on these types of Web sites. By doing so, it could eliminate the exclusion you have from registration as an Investment Adviser under the Investment Advisers Act of 1940 because you would be “holding out” as an investment adviser. Holding out is a term that basically means that you are advertising your services as an investment adviser. If you advertise as an investment adviser, you must register as one with either your state regulator or the SEC. Typically, registering as an investment advisor requires that you pass a Series 65 examination and meet other requirements.

The standard definition of “holding out” is as follows:

Advisers may be holding themselves out as investment advisers if they advertise advisory services, use the label "investment adviser" on business cards or stationery, list themselves as advisers in telephone, business, or building directories, or let it be known generally by word of mouth or otherwise that they are available to accept new advisory clients.

Requirements for valid Web sites for posting your data
Generally, the SEC’s no-action letters and other guidance indicate that the following would be necessary to ensure the simple posting of information on an Internet site would not be considered “general solicitation and advertising” if the Web site:

• is run by a broker/dealer registered with the NASD (or is affiliated with such a broker/dealer);
• requires a password to gain access;
• requires that the broker/dealer have a pre-existing, substantive relationship with the prospective investor; and
• requires that the person signing up for access to the service be qualified as an accredited investor.

One of the no-action letters specifically states that the “pre-existing, substantive relationship with the prospective investor” can be accomplished via a questionnaire providing the broker/dealer with sufficient information to evaluate the offeree’s sophistication and financial situation.

Note that if the broker/dealer arranges for or facilitates a transaction between a hedge fund and an accredited investor introduced to the hedge fund by the broker/dealer, the broker dealer is responsible to qualify the prospective investor as an accredited investor, and to open an account with the investor. These stipulations were designed to allow the broker/dealer to fall under the safe harbor of not having a general solicitation when there is a “pre-existing, substantive relationship between an issuer, or its broker/dealer, and the offerees.”

Conclusion and caveat
The bottom line is that it is fine to use certain Web sites to post your data, as long as each site you use is following all of the SEC’s rules. However, pay strict attention to any sites where you think it would be of value to post your information. Compare the way they operate to the SEC’s no-action letters and other guidance. You do not want to lose your exclusion from registration as an Investment Adviser. Also, make sure you know whether you are subjecting yourself to a fee or commission payable to the broker/dealer if they bring you an investor/client. It is your responsibility to ensure that you do not lose your Investment Adviser exemption, and to know your obligations if the site matches you up with a prospective investor.