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Attack of the Indirect Investor, Again 09/28/2017

Posted by Morse Barnes-Brown Pendleton in Attorney News, Financial Services, Private Investment Funds & Advisers.
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JHW Headshot Photo 2016 (M0990045xB1386)A Texas-based retirement fund that does not own any Uber securities sued Uber and its former chief executive officer Travis Kalanick for making misleading statements to investors. The retirement fund claims that it was harmed when the value of its indirect investment in Uber fell after investors learned that Uber was “operating a business far different than what investors had been led to believe.” In the follow-up article to his previously published piece, Attack of the Indirect Investor, private funds attorney Josh Watson outlines yet another case involving a lawsuit by indirect investors, and the consequences for investment managers.

Read Attack of the Indirect Investor, Again. For more information, please contact Josh Watson or a member of our PIFA practice.

SEC Targets Broken Deal Expenses, Again 09/26/2017

Posted by Morse Barnes-Brown Pendleton in Financial Services, Private Investment Funds & Advisers, Venture Capital & Private Equity.
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JHW Headshot Photo 2016 (M0990045xB1386)By: Josh Watson

Private equity firm Platinum Equity Advisors, LLC (Platinum) improperly charged broken deal expenses to three of its private equity fund clients, according to a settlement with the Securities and Exchange Commission on September 21, 2017. The settlement requires Platinum to reimburse its clients for $1.7 million of improper charges and pay a $1.5 million civil penalty.

Platinum advises private equity funds Platinum Equity Capital Partners L.P., Platinum Equity Capital Partners II, L.P., and Platinum Equity Capital Partners III, L.P. These are multi-investor, multi-investment private equity funds that have capital commitments of $700 million, $2.75 billion, and $3.75 billion, respectively. Platinum also forms and advises co-investment vehicles that invest alongside the firm’s private equity funds.

Platinum disclosed to investors that its private equity funds would be responsible for bearing their own broken-deal and other expenses, including “[a]ll out-of-pocket fees, costs, and expenses, if any, incurred in developing, negotiating, and structuring prospective [p]ortfolio [i]nvestments that are not ultimately made.” Platinum also disclosed to investors that it would establish co-investment vehicles that invest alongside its private equity funds.

Platinum’s disclosure of broken deal fees was inadequate, according to the SEC, because Platinum failed to disclose the fact that its private equity funds would bear 100% of all broken deal expenses and that Platinum’s co-investors, who benefit from Platinum’s sourcing of private equity transactions, would bear none of these expenses.

In finding that Platinum’s disclosures were inadequate, the SEC focused on specific statements in the funds’ partnership agreements and private placement memoranda. Each fund’s partnership agreement stated that the fund would be responsible for expenses “of the [p]artnership.” Each fund’s private placement memorandum stated that the fund would pay all expenses “related to its own operations.” The SEC apparently interpreted the references to expenses “of a [p]artnership” and a partnership’s “own expenses” to mean the partnership’s proportionate share of such expenses.

By allocating all broken deal expenses to its private equity funds without adequately disclosing this practice to prospective investors, Platinum violated Section 206(2) of the Advisers Act, which prohibits an investment adviser from engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.

The SEC’s settlement with Platinum does not break new ground. The SEC previously alerted the investment community to its concerns about how firms allocate broken deal expenses in its 2015 enforcement action against Kohlberg Kravis Roberts & Co. The takeaway for managers is that proper advance disclosure is required when a firm client is required to bear a disproportionate amount of expenses related to deals that are never actually consummated.

Read more about the settlement:

https://www.sec.gov/litigation/admin/2017/ia-4772-s.pdf

https://www.sec.gov/litigation/admin/2017/ia-4772.pdf

OCIE Issues Risk Alert on Misleading Advertising Practices 09/22/2017

Posted by Morse Barnes-Brown Pendleton in Financial Services, Private Investment Funds & Advisers.
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JHW Headshot Photo 2016 (M0990045xB1386)By: Josh Watson

The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert on September 14, 2017 identifying misleading advertising practices that examiners have found during examinations of registered investment advisers.

The misleading practices identified in the alert are those that are widely-known to be misleading. For example: (1) Presenting performance results on a gross basis, rather than a net-to-investor basis; (2) Presenting profitable investments without disclosing unprofitable investments made during the same time period; and (3) Presenting hypothetical and back-tested performance results without disclosing other information that an investor would need to evaluate the relevance of the results.

The fact that OCIE issued a risk alert on this topic suggests that OCIE may be seeing an uptick in misleading advertising practices. Having now been warned, advisers should evaluate whether their advertising practices comply with regulatory and fiduciary requirements, and whether they have adequate procedures in place to ensure continued compliance with these requirements.

For more information, read the full alert.

Attack of the Indirect Investor 09/21/2017

Posted by Morse Barnes-Brown Pendleton in Attorney News, Financial Services, Private Investment Funds & Advisers.
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JHW Headshot Photo 2016 (M0990045xB1386)A company’s indirect investors may sue the company and its principals for fraud, according to a recent federal court ruling in Robert Colman et al. v. Theranos Inc. et al. Private funds attorney Josh Watson discusses the case in his article “Attack of the Indirect Investor.” He explains that investment managers who syndicate investment opportunities through single purpose vehicles (SPVs) should be concerned about the ruling because it undermines their control over potential disputes with portfolio companies and their relationships with portfolio company management.

Read the full article on our website. For more information, please contact Josh Watson or a member of our PIFA practice.

Josh Watson Moderating Private Equity and VC Funds Program at ABA Business Law Section Annual Meeting 09/14/2017

Posted by Morse Barnes-Brown Pendleton in Attorney News, Events, Financial Services, Private Investment Funds & Advisers, Venture Capital & Private Equity.
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JHW Headshot Photo 2016 (M0990045xB1386)At this year’s ABA Business Law Section Annual Meeting, private funds attorney Josh Watson will serve as the program chair and moderator for the program “End of Life Issues for Private Equity and Venture Capital Funds.” The program will be presented by the Private Equity and Venture Capital committee and will cover issues faced by private funds as they approach the end of their life spans. Topics include term extensions, secondary sales, restructurings, and conflicts of interest.

The program will be held this Friday, September 15 at 8am. For more information, view the meeting guide.

The Risks of Using Finders and Unregistered Brokers 06/21/2017

Posted by Morse Barnes-Brown Pendleton in Attorney News, Corporate, Financial Services, Private Investment Funds & Advisers.
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JHW Headshot Photo 2016 (M0990045xB1386)Private fund managers often use placement agents, finders, and other intermediaries to help raise capital for their investment funds. Using an intermediary that has failed to register as a broker-dealer, however, is fraught with risk. In his article “The Risks of Using Finders and Unregistered Brokers”, private funds attorney Josh Watson cautions against using unregistered brokers and describes how to determine when an intermediary should be registered.

Read the full article on our website. For more information, please contact Josh Watson or a member of our PIFA practice.

Registration Exemptions for Investment Advisers 06/08/2017

Posted by Morse Barnes-Brown Pendleton in Attorney News, Corporate, Financial Services, MBBP news, Private Investment Funds & Advisers, Venture Capital & Private Equity.
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JHW Headshot Photo 2016 (M0990045xB1386)When may an investment adviser avoid registering with the Securities and Exchange Commission? Private funds attorney Josh Watson answers this question in his article “Registration Exemptions for Investment Advisers” that summarizes the requirements of two registration exemptions that are available to managers of private investment funds.

To learn about the two registration exemptions read the full article on our website. For more information, please contact Josh Watson or a member of our PIFA practice.

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