According to hedge fund lobbyists, the Commodity Futures Trading Commission (“CFTC”) may be blocking more than $3 billion in private investment.
In 2012, Congress enacted the Jumpstart Our Business Startups (“JOBS”) Act, which significantly eases certain securities law requirements in order to facilitate capital formation and job creation. A major change was lifting advertising restrictions for private investment funds to allow such funds to reach a larger pool of investors. However, some private fund managers may be reluctant to move forward, for fear of the CFTC, which has failed to update the same language in its own regulations.
The business models of many hedge funds and other private investment funds rely on Rule 506 of Regulation D to avoid the Securities Act of 1933’s costly registration requirements. Historically, some of the most important limitations imposed by Rule 506 were its bans on general solicitation and advertising. But pursuant to the JOBS Act, the Securities Exchange Commission amended Rule 506 (and Rule 144A) under the Securities Act to lift these bans in Rule 506 and 144A offerings.
The CFTC has yet to lift its advertising restrictions, though perhaps with good reason. The CFTC’s stated mission is “to protect market participants and the public from fraud, manipulation, abusive practices and systemic risk related to derivatives.” Many hedge funds are subject to CFTC regulatory frameworks because they invest in futures and other financial derivatives. By contrast, many other private funds, such as private equity funds and venture capital funds, do not use derivatives.
Post 2008, financial derivatives’ complexity and high risk profiles still have regulators, and citizens, on alert. This may be the reason why the CFTC has remained largely silent in the midst of recent media attention.