The use of social media in marketing has become more prolific in the past two years with the growing adoption of sites like LinkedIn, Twitter and Facebook. While the hedge fund industry uses these mediums to network and build existing and potential new relationships, there are some major regulatory issues related to Regulation D that managers must consider when engaging in the use of social media as a marketing tool. According to Jay Gould, head of the Investment Funds Practice at Pillsbury Winthrop Shaw Pittman, the strict interpretation of Regulation D has been substantially ignored by hedge funds. Mr. Gould, formally an attorney with the SEC, says that while the rules around Regulation D may seem onerous, it is critical to be vigilant about not engaging in conduct that could be viewed by regulators as making a public offering of a hedge fund.
On January 25, 2010, FINRA released Regulatory Notice 10-06, which provides additional guidance on the use of blogs and social networking sites. According to Smarsh.com, “with the release of Notice 10-06, FINRA makes it very clear that all communication via the Internet, including the social networks, is the same as in-person or written communication. As a result, this electronic communication can be considered correspondence, a public appearance, an advertisement or sales literature.” To gain access to the free white paper titled “The Companion Guide to FINRA/SEC Social Networking Compliance” go to Smarsh.com.
As most managers know, it is against Regulation D to advertise a hedge fund to any investor who is not a qualified investor or purchaser and with whom the manager does not have a pre-existing relationship. Regulation D causes many obstacles and frustration for managers as they try to market their hedge fund and raise capital in an ever-growing competitive environment. While joining a group like the Hedge Fund Group or the Family Office Group on LinkedIn is worthwhile, it is not advisable to add discussions that relate to a managers’ specific fund. To add educational content is copasetic, but to discuss specifics about a fund, like describing performance, breaks Regulation D and a manager may face stiff penalties.
There are a handful of Regulation D and LAMP compliant options available that give a safe platform to promote a hedge fund product. Social networking sites and hedge fund databases that allow managers to promote their fund should pre-qualify all investors who gain access to the fund information. In addition, all fund-related information must be delivered within a password-protected environment. Managers can post their returns on databases like Morningstar, Hedgefund.net, Eureka Hedge and BarclayHedge. Legally qualified investors are approved by the database group and are given a password to access the site. While these databases do not offer interactive networking capabilities, they do offer a legal platform to market a fund.
Hedge Connection and the Global Hedge Fund Forum are interactive social networking sites that allow hedge funds to source investors that may be interested in considering an investment in their fund. Hedge funds can display their marketing materials, search for potential investors and then reach out to investors that have been identified by the fund. The funds can piggy-back on the pre-existing relationship of the investors on these sites and legally contact the investor about their fund. The difference between meeting an investor through Hedge Connection or the Global Hedge Fund Forum and being introduced by a third party marketer is that these sites do not get paid a percentage of the manager’s fees if the investor makes an investment. Another powerful result of using social media to market a fund is that it breaks down geographical boundaries. For example, a fund that participates in the Global Hedge Fund Forum or Hedge Connection gets exposure to and has access to investors in over 30 countries. Investors in Asia who are interested in US managers can begin research and communicating with funds around the world from the comfort of their office. Large family offices in Geneva as well as banks in Singapore and Financial Advisors in Brazil have used both sites as an integral part of their initial investment search.
In summary, using social media to market is a powerful tool if used correctly. It is prudent to check with an attorney or a compliance officer before using social media to promote any private placement. But hedge funds in particular must take note because they must comply with Regulation D when marketing in all mediums.
Since 2005 Hedge Connection has offered turnkey marketing programs that give hedge funds access to qualified individuals and institutional investors via the website and through private live events. Hedge Connection also offers a virtual event called the Global Hedge Fund Forum where hedge funds can present to a group of pre-qualified investors. The GHFF is hosted on Leebug.com. Leebug is a web and mobile platform that engages delegates throughout the conference ecosystem and enhances the event experience by offering robust social networking tools.