SEC Private Funds Rule No Longer Valid – Potential Implications for Non-U.S. Limited Partner Investors

On 4 September 2024, the United States Securities and Exchange Commission (SEC) issued a statement stating that it has made “a strategic decision to focus resources on adopting and implementing other items on our rulemaking agenda.”[1] This comment refers to the SEC’s decision not to appeal to the United States Supreme Court a decision of the 5th Circuit Court of Appeals, which overturned the SEC’s final rule on Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews (the Proposed SEC Private Funds Rule) on the grounds that the SEC did not have the authority to issue it.[2] As a result, the Proposed SEC Private Funds Rule is no longer valid.

The Proposed SEC Private Funds Rule generally prohibited private funds (i.e. venture capital funds, private equity funds, hedge funds) with U.S. general partners from offering preferential terms to limited partners relating to redemption and enhanced disclosures of information on portfolio companies. All other preferential terms provided to limited partners had to be disclosed to all other limited partners, potentially negating their intended effect, as the other limited partners may then have insisted on the same preferential rights.
 

Potential Implications for Significant Non-U.S. Limited Partner Investors

Non-U.S. anchor investors (e.g. sovereign wealth funds, pension funds, endowments, insurance companies etc…) who wish to deploy significant funds to U.S. venture capital, private equity, and/or hedge funds may revert to the practices prior to the Proposed SEC Private Funds Rule. Namely, they may request from the U.S. general partner preferential economic rights (e.g. reduced carry, early or special redemption, reduced management fees), information rights (portfolio company investments and their exit progress), and/or operational rights (e.g. a seat on an advisory board, or even the ability to veto or have a say in certain investments made by the fund, e.g. in specific regions or sectors). There is no longer a concern that these rights may adversely impact the fund’s ability to attract other investors, as required disclosures and/or prohibitions that would have applied under the Proposed SEC Private Funds Rule would no longer apply.
 

Potential Implications for Other Non-U.S. Limited Partner Investors

Non-U.S. investors who are not anchor investors should be mindful of the potential impact of the SEC Private Funds Rule on their proposed investments in private funds managed by U.S. general partners. The informational materials they receive from the general partner may only apply to a sub-set of proposed limited partner investors, with different rights applying to anchor investors or U.S. long-term or strategic investors. These non-U.S. investors should always ask the general partner questions about the treatment of other limited partners, and they could even insist on a representation and warranty stating that the fund has not provided preferential rights to others, either generally or for a sub-set of investors at a specified investment range.

For more information on how we can help you with U.S. corporate and compliance matters, please contact Charles Wu at Charles.Wu@clydeco.com

^[1] Bloomberg, SEC Ends Legal Push to Revive Hedge Fund Fee Disclosure Rule

^[2] National Association of Fund Managers vs. SEC