May
29, 1998
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT
Our Ref.
No. 98-123
Lamp
Technologies, Inc.
File No. 132-3
By letter
dated April 27, 1998, you request assurance that the staff would not recommend
that the Commission take any enforcement action if certain information
concerning privately offered investment companies ("private funds") is posted on
a web site administered by Lamp Technologies, Inc. ("Lamp") that
is operated as described in your May 6, 1997 letter (the "Original
Letter") and the response of the Division of Investment Management dated May
29, 1997 (the "Original Response"), with the modifications described below.
Specifically, you request assurance that the posting of information on the web
site would not (i) involve any form of general solicitation or general
advertising on behalf of a private fund within the meaning of Rule 502(c) of
Regulation D under the Securities Act of 1933 ("Securities Act"); (ii)
constitute a public offering of securities by a private fund within the meaning
of Section 3(c)(1) or Section 3(c)(7) of the Investment [*2] Company Act of 1940 ("Investment Company
Act"); or (iii) cause any investment adviser to a private fund to be deemed to
be holding itself out generally to the public within the meaning of Section
203(b)(3) of the Investment Advisers Act of 1940 ("Advisers Act").
Facts
Lamp is engaged in the business of data
processing, software development, and the creation and maintenance of web sites.
Lamp currently operates a web site that contains information concerning private
funds, i.e., funds that are excluded from the definition of
investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment
Company Act and that are privately offered under Regulation D under the
Securities Act. n1 The operation of the web site is described in greater detail
in the Original Letter.
n1 Section 3(c)(1) excepts from the definition
of investment company any issuer (i) whose outstanding securities (other than
short-term paper) are beneficially owned by not more than 100 persons, and (ii)
that is not making and does not presently propose to make a public offering of
its securities. Section 3(c)(7) excepts from the definition of investment
company any issuer, the outstanding securities of which are owned exclusively by
persons who, at the time of acquisition of such securities, are "qualified
purchasers" (as defined in Section 2(a)(51) of the Act), and which is not making
and does not at that time propose to make a public offering of such securities.
[*3]
In the Original Letter, you stated that each subscriber would pay a
subscription fee. You also stated that each subscriber would be a "qualified
eligible participant" as defined in Rule 4.7 under the Commodity Exchange Act
("QEP") and, as a QEP, would have an investment portfolio of at least $ 2
million. Further, you stated that the private funds would be structured as
limited partnerships or other collective investment vehicles, and that these
funds would be privately offered in compliance with Regulation D.
You
now propose to eliminate the requirements that subscribers pay any set
subscription fee and qualify as a QEP. You also now state that the private funds
may
be structured as domestic or foreign partnerships, limited liability companies,
trusts or other entities.
Analysis
The
Commission has indicated that the placement of private offering materials on an
Internet web site, without sufficient procedures to limit access to accredited
investors, would be inconsistent with the prohibition against general
solicitation or advertising in rule 502(c) of Regulation D. n2 In an
interpretive letter issued to IPOnet (pub. avail. July 26, 1996), the staff of
the Division of Corporation [*4] Finance
stated that the posting of a notice of a private offering on a web site would
not be deemed a "general solicitation" or "general advertising" within the
meaning of Regulation D when pre-qualification and password-protection
procedures designed to limit access to the web site to accredited investors were
in place. As a general matter, if an offer is public for purposes of the
Securities Act, then it also would be public for purposes of Section 3(c)(1) and
Section 3(c)(7) of the Investment Company Act. n3
n2
See Use of Electronic Media for Delivery Purposes, Securities
Act Release No. 7233 (Oct. 6, 1995).
n3 See, e.g.,
Gerard Rizzuti (pub. avail. June 7, 1983) (staff stated that, if an offer is
public for purposes of the Securities Act, it also would be public for purposes
of the Investment Company Act).
In the Original Response, we stated
that, based on the use of procedures designed to limit access to the information
on the web site to a select group of accredited investors, we believed that the
posting of private fund information on the web site would not constitute a
public offering of securities by a private fund within the meaning of Section
3(c)(1) [*5] or
Section 3(c)(7). n4 You argue that, in IPOnet, it was only necessary that each
subscriber be an accredited investor. It was not necessary that each subscriber
pay a subscription fee or be a QEP, which you state includes having a $ 2
million investment portfolio. n5 You therefore believe that the elimination of
these requirements should not affect the staff's position in the Original
Response.
n4 As noted in the Original Response, however, while access to
the web site must be predicated upon satisfying the definition of an accredited
investor, private funds that are structured in reliance on Section 3(c)(7) would
be required to limit sales of securities to "qualified purchasers," as defined
in Section 2(a)(51) of the Investment Company Act. Qualified purchasers
generally must own very substantial investments. See, e.g.,
Section 2(a)(51)(i) (defining "qualified purchaser" to include a natural person
who owns "not less than $ 5,000,000 in investments, as defined by the
Commission").
n5 We note that the size of a subscriber's investment
portfolio may
be relevant to determining whether the subscriber is an accredited investor.
See, e.g., Rule 501(a)(5) (defining "accredited investor" to
include a natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of purchase exceeds $ 1 million). [*6]
We agree that the elimination of
these requirements would not affect our position regarding whether the posting
of information about private funds on the web site would constitute a public
offering of securities by these funds within the meaning of Section 3(c)(1) or
Section 3(c)(7) of the Investment Company Act. On this basis, we would not
recommend that the Commission take any enforcement action under Section 7 of the
Investment Company Act if Lamp posts information concerning private funds on the
web site in the manner described in the Original Letter and your letter dated
April 27, 1998.
The Division of Corporation Finance has asked us to
inform you that, provided that access to the web site continues to be limited
exclusively to "accredited investors" within the meaning of Rule 501 of
Regulation D, the Division will not object to the proposed modifications. More
specifically, based on the description of such modifications set forth in your
letter dated April 27, 1998, the Division sees no reason to alter its previous
grant of no-action relief pursuant to the Original Response. n6
n6 In
reaffirming the positions taken in the Original Response, the Divisions express
no view regarding the applicability of the Commodity Exchange Act to the posting
of information about private funds on the web site. [*7]
In the Original Response, we also
stated that an investment adviser that posted only information about private
funds on the web site would not be "holding itself out generally to the public"
as an investment adviser within the meaning of Section 203(b)(3) of the Advisers
Act. n7 This position was based on Lamp's use of procedures designed to limit
access to the web site information to a select group of accredited investors and
its requirement that managers of the private funds agree to post only
information related to these funds on the web site and not to offer other
services or products on the site. You ask that we clarify that this position
would not be affected if the private funds were structured as domestic or
foreign partnerships, limited liability companies, trusts or other entities. We
agree that our position would not be affected if the private funds were so
structured.
n7 Section 203(b)(3), in pertinent part, provides an
exemption from registration for any investment adviser that during the preceding
12 months had fewer than 15 clients, and that neither holds itself out generally
to the public as an investment adviser nor acts as an investment adviser to any
registered investment company. [*8]
Please note that these positions are based on the facts and
representations set forth in the Original Letter and your letter dated April 27,
1998. Any different facts or representations may require a different conclusion.
Martin Kimel
Senior Counsel
INQUIRY-1: SIDLEY & AUSTIN
A
PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60603
TELEPHONE 312 853 7000
FACSIMILE
312 853 7036
FOUNDED 1866
WRITER'S DIRECT NUMBER
312/853-2140
April 27, 1998
Martin Kimel, Esq.
Senior Counsel
Office of the General Counsel
Division of Investment
Management
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Barak Romanek, Esq.
Special
Counsel
Division of Corporation Finance
Securities and Exchange
Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Lamp
Technologies, Inc.
Revised No-Action Request
Gentlemen:
On behalf of this firm's client, Lamp
Technologies, L L C ("Lamp"), we are writing to request that the Division
of Investment Management and the Division of Corporation Finance confirm to us
that they will not recommend that the Securities and Exchange Commission (the
"SEC") take any enforcement action against Lamp [*9] or any participating hedge fund manager or
investment adviser if certain information concerning hedge funds is posted on a
World Wide Web site named HedgeScan administered by Lamp, which site will be
operated in the manner described in our May 6, 1997 no-action request (the
"Original Request") and the response of the Division of Investment Management
dated May
29, 1997 (the "Original Response"), with the modifications described herein.
Specifically, we seek assurance that the proposed activity will not (a) involve
any form of general solicitation or general advertising on behalf of any hedge
fund within the meaning of Rule 502(c) under the Securities Act of 1933 (the
"Securities Act"), (b) constitute a public offering of securities by any hedge
fund within the meaning of Section 3(c)(1) or Section 3(c)(7) of the Investment
Company Act of 1940 (the "Company Act"), or (c) cause any investment adviser to
a participating hedge fund to be deemed to be holding itself out generally to
the public within the meaning of Section 203(b)(3) of the Investment Advisers
Act of 1940 (the "Advisers Act").
Lamp has advised us that it is
currently operating HedgeScan in all material respects in the manner [*10] described in the Original Request and the
Original Response. As discussed recently with Mr. Kimel and Mr. Romanek, Lamp
would now like to change two features of HedgeScan. Lamp also would like to
clarify one point in the Original Response.
First, Lamp would like to
eliminate the requirement that a specific subscription fee be payable by
HedgeScan subscribers (stated as approximately $ 500/month in the Original
Response). Lamp would like the ability to charge whatever fees it deems
appropriate for HedgeScan. This change is driven by marketing concerns, namely
that Lamp needs more pricing flexibility to properly market HedgeScan. This
pricing change does not reflect any change in the types of subscribers being
solicited by Lamp or the purposes of HedgeScan.
The fee requirement was
included in the Original Request as an additional factor in restricting the
subscriber base to a limited number of market professionals and ensuring that
subscribers did not join HedgeScan to invest in any particular hedge fund (and
thus that qualification of subscribers by Lamp would not be deemed a
solicitation for any particular fund). However, we believe that there are
compensating factors that make the [*11] fee
requirement unnecessary. Specifically, the accredited investor requirement and
30-day waiting period will limit the number and type of subscribers and the
waiting period and periodic (e.g., quarterly or annual) availability of most
hedge funds for subscription should ensure that subscribers to HedgeScan do not
subscribe to invest in any particular fund. We would also note that (1) SEC Rule
506 (under which almost all hedge fund sales are made in the United States) does
not limit the number of accredited investors that may invest in a Rule 506 private
offering, (2) the Division of Corporation Finance did not impose any specific
fee requirement in the IPOnet letter (publ. avail. July 26, 1996) and (3) the
"Analysis" section of the Original Response (which section specifies the basis
for each Division's position) does not mention or appear to rely on the fee
requirement.
Second, Lamp would like to eliminate the requirement that
each subscriber be a "qualified eligible participant" ("QEP") as defined in
Commodity Futures Trading Commission Rule 4.7 (which includes, among other
things, a $ 2 million investment portfolio requirement). This requirement was
included in the Original Request [*12]
because it was contemplated that many participating hedge funds would be exempt
commodity pools permitted only to accept QEP's as investors. In fact, however,
the participating hedge funds consist in large part of hedge funds which either
are not commodity pools at all (since they don't use futures contracts) or are
non-exempt commodity pools (which are not subject to the QEP requirement).
Hence, the QEP threshold is not necessary to accomplish Lamp's objectives. We
would also note that the "accredited investor" threshold was deemed sufficient
by the Division of Corporation Finance in the IPOnet letter (publ. avail. July
26, 1996).
Third, Lamp would like to clarify that the participating
hedge funds may
be structures as domestic or foreign limited partnerships, limited liability
companies, trusts or other entities. This issue arises because the Original
Response on page four noted that HedgeScan "will exclusively concern funds
structured as limited partnerships." As a practical matter, hedge funds utilize
many forms of organization, the limited partnership only being one such form
(albeit the most popular structure for domestic hedge funds). The form of
organization should have no [*13] impact
on the legal analysis, so long as the funds otherwise fall within the
description of hedge funds in the Original Request and Original Response.
Because access to HedgeScan will be restricted to a select group of
subscribers who have been pre-qualified through the use of a generic
questionnaire as accredited investors, and for the other reasons noted in our
Original Request, we believe that the posting of information concerning hedge
funds on HedgeScan will not (a) involve any form of general solicitation or
general advertising within the meaning of Rule 502(c) under the Securities Act,
(b) constitute a public offering of securities within the meaning of Section
3(c)(1) or Section 3(c)(7) of the Company Act, or (c) cause any unregistered
investment adviser to hold itself out generally to the public within the meaning
of Section 203(b)(3) of the Advisers Act. We respectfully request your
reconfirmation that you will not recommend that the SEC take any enforcement
action on the foregoing basis if HedgeScan is operated as described in the
Original Request, as modified herein.
Pursuant to SEC Release No.
33-6269, we herewith enclose seven copies of this no-action request. We also
[*14]
enclose herewith copies of the Original Request and the Original Response.
Please contact the undersigned at (312) 853-2140 with any comments or
questions you may
have.
Sincerely,
William D. Kerr