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Lipper HedgeWorld's Education Center
Hedge Funds & the Internet
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NEW to this section!
Download in PDF format a recent article by Michael G. Tannenbaum, Esq. entitled
"U.S. Regulation of Offers of Investment Advisory Services and Hedge Fund Marketing over the
Internet."
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I am a fund manager. How can I use the web to disseminate information about my fund?
This is a very important question, given two seemingly conflicting issues. One of the
primary benefits of doing business on the internet is the efficient and economical means
of disseminating information to a global audience. But US-domiciled hedge funds are
private placements and cannot hold themselves out for solicitation, and offshore hedge
funds are off limits to most US investors. These restrictions on the ways hedge funds
raise capital are at odds with the inherent nature of the internet.
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Use of the Internet by Domestic Hedge Funds
In 1995, the SEC determined that providing offering materials for a hedge fund on a website
constitutes a general advertisement or solicitation, unless the materials are only provided
to persons who had a previous relationship with the issuer-even when access to those
materials is restricted to password holders. There may be no links from outside the site to
an interior page of the fund website. And passwords may be given only to users with
previous relationship to fund and only if financial sophistication is verified.
One solution to these restrictions is for the hedge fund website to consist of very simple front page, only listing
name of fund and request for the user's name and a password.
In addition, there are several issues that the hedge fund manager should keep in mind:
- Investment managers with related businesses that can be marketed over the Internet must pay
close attention to the way links are used.
- The more information that is available increases the chances that the website will be deemed
solicitous.
- "Spamming", or sending out mass emails, is considered general solicitation.
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Use of the Internet by Offshore Hedge Funds
One would think that since offshore hedge funds are not directed at US investors, they are
outside the jurisdiction of US regulators. However, the global nature of the internet means
that the websites of offshore funds are still accessible to US investors. In this regard,
the SEC is still quite interested in the ways in which offshore hedge funds use the internet
to disseminate information.
In 1998, the SEC released the "Use of Internet Websites to Offer Securities, Solicit
Securities Transaction or Advertise Investment Opportunities Offshore." This set of guidelines
states that offshore funds must "implement measures that are reasonably designed" to guard
against sales to US investors.
Areas of concern for offshore hedge funds:
- Email: in addition to the restriction against spamming that applies to US and offshore funds,
the offshore fund has the burden of determining whether the receiver is a US investor.
- Website disclaimers should be displayed prominently on the website and should clearly and
meaningfully state that the offer is directed only to persons outside of the US
- establishing reasonable procedures to guard against US investors
In addition to maintaining a password-protected website, offshore hedge funds can follow several
procedures to assure the non-US status of potential investors. They can:
- Ask for proof of non-US residency;
- Obtaining mailing addresses prior to sale;
- Refuse to sell to investors with a US mailing address or area code;
- Additionally, they should beware of checks drawn on US banks.
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Fund of Funds
Fund of funds and multiple offerings that combine US and Offshore funds must be most cautious in
the construction of a website, since these sites must abide by the restrictions for both US and
offshore funds with respect to issues such as password protection and determining residency.
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