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Should Private Equity Middlemen be Worried? New Rule Could Lead to Emergence of Online Fundraising Platforms

Traditionally, most private equity funds use placement agencies to market, provide access to investors, and sell securities in their funds.1 The resulting relationship between the placement agencies and private equity funds essentially allows powerful agencies to control investor entrance to attractive funds.2 However, several start-up technology platforms have emerged in an effort to provide an online service connecting accredited investors with private equity funds and in the process capture some of the market now cornered by placement agencies.3

The trend comes on the heels of the SEC’s July approval and September effective date implementing a Jumpstart Our Business Startups Act of 2012 (JOBS Act) requirement to lift the general solicitation ban on certain private funds.4 The new regulations specify in Rule 501 of Regulation D that funds provide official documentation to confirm that each investor meets the requirements to be qualified as an accredited investor.5 However, several of these online services include vetting services to make sure investors are accredited,6, and several stand alone companies providing investor accreditation verification reports are now emerging and partnering with these platforms.7

Supporters of the rule change contend that lifting the advertising ban helps update securities regulations to modern financial markets.8 The rule change “makes some of the private equity world public.”9. In addition, in recent years public investment in private equity funds has become more common and private equity giants like Blackstone Group and Kohlberg Kravis Roberts are now publicly traded.10 

The news is not negative for all placement agencies. Given that only seven percent of households qualify as “accredited investors” – those having a net worth of at least $1 million or annual income of more than $200,000 – aggressive marketing is not efficient for most funds.11  Further, powerful firms such as Credit Suisse are actually partnering with these platforms.12 Presumably, these platforms will allow funds to reach a larger number of potential investors thus decreasing investor risk by asking for smaller investments. While some placement agencies surely see this as a negative, others think it will actually make the private equity fundraising process more efficient and allow smaller investors whom may not be on large placement agencies’ radar to access this market.13

Even renowned research firm Preqin seems to be embracing the trend; they launched a test platform this month charging subscription fees to fund managers but providing free access to investors.14 And Palico now lists about 1,300 members on their platform including the California Public Employees’ Retirement System.15

Few of these systems are fully operational at this point so their effect on the private equity world is yet to be fully realized. There is no denying that funds will be able to reach a larger and more diverse investment base, but we will have to wait and see if fund managers value the services as many skeptics, including Jeff Berman of Clifford Chance, feel that fund managers “are looking for highly sophisticated investors who value discretion – and people who have the wherewithal to honor the commitments they make.”16 


  1. Scott W. Naidech, Private Equity Fund Formation 11 (Practical Law Company, 2011), available at http://www.chadbourne.com/files/Publication/3d5a9a56-734c-4d30-a5e4-0a8c593967ab/Presentation/PublicationAttachment/12cdc9fc-964d-4b0e-a0d4-c48ce9dd7c2f/Naidech_PrivateEquityFundFormation_Nov11.pdf

  2. William Alden, Private Equity’s Online Courtship, N.Y. Times (Nov. 11, 2013, 10:28 AM), http://dealbook.nytimes.com/2013/11/11/private-equitys-online-courtship/

  3. Id. 

  4. SEC Approves JOBS Act Requirement to Lift General Solicitation Ban, U.S. Securities and Exchange Commission (July 10, 2013), http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539707782#.UoRigJGQfFI

  5. Tanya Prive, General Solicitation Ban Lifted Today – Three Things You Must Know About It, Forbes.com (Sept. 23, 2013, 12:00 AM), http://www.forbes.com/sites/tanyaprive/2013/09/23/general-solicitation-ban-lifted-today-three-things-you-must-about-it/

  6. Alden, supra note 2 

  7. Paul Spinrad, Online Platforms Give the First Public Look at Private Equity, Pub. Broad. Servs. (Sept. 24, 2013), http://www.pbs.org/mediashift/2013/09/private-equity-goes-public/

  8. Peter Lattman, S.E.C. Lifts Advertising Ban on Private Investments, N.Y. Times (July, 10, 2013, 4:04 PM), http://dealbook.nytimes.com/2013/07/10/s-e-c-lifts-advertising-ban-on-private-investments/

  9. Spinrad, supra note 7 

  10. Lattman, supra note 8. 

  11. Id. 

  12. Alden, supra note 2. 

  13. Id

  14. Id. 

  15. Id. 

  16. Id. 

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Alexander Wharton

Vol. 3 Associate Editor
University of Michigan JD Candidate, 2015 University of Notre Dame BA in Political Science, 2008