Q. So the expected rule change tomorrow about advertising private placements has some huge implications for fund managers and investors– but there are still lots of limitations to think about.
A. Right. First off, the rules will still require that private placements only be purchased by accredited investors, AIs. Those are folks with net worth of $1mm, not counting their principle residence, or who have annual income of $200,000 ($300,000 with a spouse). So, advertisements of private placements can go out to anyone, but only AIs can buy.

Q. But that does not mean that hedge funds, for example, can just start selling to accredited investors without any limitations…
A. That’s right. There are other rules that come in to play. First off, managers can only charge performance fees to “qualified clients”– those are people with net worth in excess of $2mm, not $1mm. This is an interesting point, by the way, because a lot of criticism of these new rules is about the idea that hedge fund fees are too high for AIs. But you can’t charge them to people who aren’t also QPs.

Q. And even then, there are limits on the number of investors you can have in a fund if the investors are just “accredited investors”, right?
A. Correct. Funds that accept AIs can only have 100 investors. So to get the scale a manager wants, he’d have to keep the minimums very high. Funds that sell to QPs, qualified purchasers, can have up to 2,000 holders, but those are folks with $5mm net worth.

Q. OK… so what have you seen managers doing to get ready for these new rules?
A. What we’re seeing is a lot of funds rushing into registration as so called “registered privates”. The bonus is that then the private placement can have an unlimited number of accredited investors and so accept any minimum. In addition, these sorts of funds don’t have any limitations on accepting ERISA money, money from Individual Retirement Accounts. The main reason you haven’t seen more of these to date is that they couldn’t advertise to get the scale that the structure allows…. but that looks like its going to change tomorrow.