Businessman making noise

More Noise About Accredited Investors In Crowdfunding

On By crowdfundattnyIn Accredited Investor, Exchange Act, Investment Company Act, Regulation A, SEC1 Comment

The House of Representatives just passed not one, not two, but three different bills that would expand the definition of “accredited investor.” Does this mean the definition will change? No.

The three proposed changes are:

  • Include in the definition of accredited investor anyone who says he or she understands the risks, using a form of not more than two pages issued by the SEC. This would effectively eliminate the concept of accredited investor.
  • Include in the definition of accredited investor anyone who has received personalized advice from a person who has himself or herself become an accredited investor under 17 CFR §230.501(A)(10), by passing an exam approved by the SEC. The mystery here is why the proposed bill wouldn’t include anyone who has received personalized advice for a registered investment adviser.
  • Allow anyone, including non-accredited investors, to invest in the aggregate up to 10% of their income or net worth in private securities. No time period is provided.

The proposed changes to the definition of accredited investor are part of a larger package of legislation that would ease more than a dozen rules in the federal securities laws, including:

  • Expand the definition of “emerging growth companies.”
  • Create a safe harbor for brokers and finders in private placements.
  • Ease the “independence” rule for auditors.
  • Ease the registration requirements under section 12(g) of the Exchange Act.
  • Expand the definition of venture capital fund for purposes of section 3(c)(1) of the Investment Company Act.
  • Add a new exemption under the Securities Act of 1933 for issuers raising less than $250,000.
  • Double the Regulation A offering limit from $75,000,000 to $150,000,000.

And so on.

This legislation can best be understood by reference to the man who introduced it, Representative McHenry of North Carolina. Representative McHenry was the principal sponsor of the JOBS Act, which created Crowdfunding. Before and since, he has been an advocate for improving access to capital for entrepreneurs and giving ordinary Americans access to opportunities now reserved for the very wealthy.

But Representative McHenry is leaving Congress. He was a close friend of Kevin McCarthy and briefly assumed leadership of the House when McCarthy was deposed. That episode seems to have drained his enthusiasm; he announced his plan to retire shortly afterward.

This legislation should probably be viewed as Representative McHenry’s swan song, his wish list, even his legacy. Unfortunately, and as I’m sure he recognizes, it’s likely that none of it will find its way into law.

Questions? Let me know.

Drafting a Form C in Reg CF

How To Draft A Form C For Regulation Crowdfunding

On By crowdfundattnyIn Crowdfunding Vehicles, Form C, Reg CF, SPVLeave a comment

Form C is the disclosure document used in Reg CF. Because I see so many Form Cs that aren’t done properly, I thought it would be worthwhile to explain how a Form C should be drafted and why too many lawyers go astray.

Rule 201 (17 CFR §227.201) tells us exactly what should be disclosed in a Form C:

  • Rule 201(a) calls for the name, legal status, physical address, and website of the issuer.
  • Rule 201(b) calls for the names and business experience of officers and directors. 
  • Rule 201(c) calls for the name of each person owning 20% or more of the voting stock.
  • All the way through Rule 201(z), which calls for copies of testing the waters materials.

Rule 201 is exhaustive, i.e., there is no disclosure requirement in Reg CF outside Rule 201, other than a short financial summary. 

If you had never prepared a disclosure document, how would you provide the disclosures required by Rule 201? Chances are, you would simply go down the list, from Rule 201(a) to Rule 201(z), and provide answers to all the questions. And that is exactly the right way to do it.

Look at this Form C, for a company called ScienceCast, Inc. Look at the Table of Contents, how it just goes through Rule 201, item-by-item. Look at the body, where each item is labeled with the corresponding rule. Look how the Form C describes the role of the crowdfunding vehicle, or SPV. If you had never prepared a disclosure document and were trying to do things right, I bet this is how you would do it.

Yet look at most of the Form Cs that are filed with the SEC. They don’t follow this format at all or follow it only loosely. In the worst case, of which there are many examples, you can’t even tell it’s a Form C. It looks like a typical Private Placement Memorandum you would see in a Regulation D offering.

And that explains why too many lawyers go off track. A lawyer who has prepared hundreds of Private Placement Memoranda thinks “A Form C is just another type of disclosure document. I’ll start with the form I’m already familiar with rather than create something new from scratch.”

Legal forms can be very useful, but they can also become like an old ship encrusted with barnacles. Over time, lawyers tend to add things to form documents as new cases are decided or new concepts come to mind, but rarely is any of the old stuff scraped away, much less the whole document re-thought.

Using the fresh-out-of-the-box Form C rather than the encrusted Private Placement Memorandum has many benefits:

  • It’s far easier to make sure all the disclosures are there.
  • It’s far easier to check for accuracy.
  • It’s far easier to create an easy-to-understand template.
  • It’s far more efficient, cutting costs.
  • It’s far easier for a lawyer to prepare or review, cutting costs.
  • It’s far easier for the funding portal to explain to the issuer.
  • It avoids all the duplication you see in a typical PPM.
  • It avoids all the state notices and other unnecessary legal boilerplate you see in a typical PPM.
  • It’s far easier for an investor to compare one offering to another.
  • It’s far easier for an investor to read and understand.
  • It uses less energy, reducing the impact of Reg CF on the fragile coral reefs surrounding Australia.

For Reg CF to grow, the industry must standardize. I hope it can at least standardize around a Form C.

Questions? Let me know.

Artificial Intelligence

Anthropic: SPVs And The Investment Company Act

On By crowdfundattnyIn Investment Company Act, SPVLeave a comment

I spend lots of time talking about special purpose vehicles (SPVs) and the Investment Company Act of 1940. Now we have a real-world example.

Anthropic was founded by Dario Amodei, who wrote the basic artificial intelligence model for OpenAI before leaving to start his own company. Once ChatGPT launched Anthropic has had no trouble raising money. They’ve raised $7.5 billion and counting in the last year.

In my humble opinion, the amount of money being thrown at Anthropic is insane. Most obviously, it demonstrates the psychological power of The Fear of Missing Out. More subtly, it represents the brokenness of venture capital culture. VCs have backed themselves into a position where they can no longer invest in businesses that are merely profitable. They need huge wins, grand slams. They bet a chunk of the farm on crypto/blockchain and lost. Now they need even bigger wins, or at least the promise of bigger wins, to keep their LPs writing checks.

Anyway, the flood of money created a problem for Anthropic that will sound familiar to many founders. The company was looking for billions, but many investors were able to invest “only” $30 – $50 million. The company didn’t want all those investors on its cap table.

So the company took the logical step:  it put the “small” investors in a separate company, an SPV, and admitted only the SPV to its cap table as a single investor.

Because its business is limited to holding securities in Anthropic, the SPV is an “investment company” under section 3(a) of the Investment Company Act. Yet it has not registered as an investment company. How does that work?

The answer is that it qualifies for the exemption under section 3(c)(1) of the Investment Company Act, section 3(c)(7) of the Investment Company Act, or both.

The exemption under section 3(c)(1) is available if the SPV has no more than 100 owners. That’s possible. If each owner invests $40 million you would raise $4 billion.

(NOTE:  the exemption under section 3(c)(1) allows 250 owners if the SPV follows a “venture capital strategy,” but this SPV was formed to invest in only one company, Anthropic.)

The exemption under section 3(c)(7) is available if each owner is a “qualified purchaser.” That term includes individuals with at least $5 million of investable assets, entities where all the individual owners have at least $5 million of investable assets, as well as other entities. I suspect the SPV qualifies under this exemption as well.

Thus, the SPV is an investment company under section 3(a), but is not required to register as such.

Finally, note that the discussion about the Investment Company Act doesn’t depend on how Anthropic raised money. It probably raised the money using Rule 506(b), taking the position that because everyone in that world knows everyone else, it had a “pre-existing relationship” with all its investors. But it could also have used Rule 506(c), assuming every investor is accredited. The point is that how you raise money and whether you need or qualify for an exemption under the Investment Company Act are unrelated.

I personally was not invited to invest in Anthropic. Imagine!

Questions? Let me know.

blind pool offerings in crowdfunding

Does Reg CF Allow Blind Pool Offerings?

On By crowdfundattnyIn Reg CF, Regulation CF2 Comments

It’s a trick question.

It’s a trick question because the term “blind pool offering” doesn’t appear in Reg CF. If you try to figure out whether Reg CF allows “blind pool offerings” you’ll drive yourself crazy and/or reach the wrong answer. 

To illustrate the point, suppose NewCo was formed to buy Class B multi-family projects in the southeastern United States but has not yet identified any such properties. If you focus on the term “blind pool offering” you might decide that NewCo can’t use Reg CF. But if you read Reg CF instead, you’ll reach the opposite – and correct – conclusion. 

To see whether NewCo is eligible for Reg CF, we look at the eligibility rules in 17 CFR §227.100(b). NewCo is a Delaware entity, so we’re good under section 100(b)(1). NewCo isn’t subject to the reporting requirements of the Exchange Act, so we’re good under section 100(b)(2). And we keep going through the list until we get to section 100(b)(6), which provides that Reg CF may not be used if the issuer:

Has no specific business plan or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies.

Does that describe NewCo? Well, no. NewCo does have a specific business plan and it’s not about merging with anyone. 

Thus, having gone through the whole list of section 100(b), we conclude that NewCo is eligible to use Reg CF, 100%.

I’ll add two epilogues.

First, Regulation A uses exactly the same language as Reg CF, in 17 CFR §230.251(b)(3). And even a cursory review of the Regulation A offerings reviewed and qualified by the SEC reveals many, many companies like NewCo.

Second, Industry Guide 5, issued by the SEC to provide disclosure guidelines for real estate offerings, specifically contemplates issuers like NewCo. Item 20D provides for certain disclosures in offerings where “a material portion of the maximum net proceeds (allowing for reasonable reserves) is not committed (i.e., subject to a binding purchase agreement) to specific properties. . . .” 

During my first year of law school in 1838, a partnership tax guru named Bill McKee insisted that we read the statute first. It has turned out to be excellent advice.

Questions? Let me know.

FinCEN

The Corporate Transparency Act

On By crowdfundattnyIn Corporate Transparency ActLeave a comment

Beginning on January 1, 2024, new and existing companies, with some exceptions, must disclose their owners to the US Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”). This is big news in the legal world, not just for Crowdfunding but for everyone.

The following summary was prepared by Chimuanya Osuoha. If you’re a client of our firm you’ve probably dealt with Chimuanya and know her to be an extremely capable young lawyer.

The Corporate Transparency Act 

General Rule

Beginning January 1, 2024, all entities that are either formed or registered to do business in the United States by filing documents with a secretary of state or a similar office under the law of a State or Indian Tribe (a “Reporting Company”) are subject to the Corporate Transparency Act (the “CTA”). Reporting Companies will be required to file a report with FinCEN including information about its “Beneficial Owners” and “Company Applicants.”

Any changes to the information, including ownership, must be reported within 30 days.

NOTE:  For the time being, the information provided to FinCEN will not be public. I say “For the time being” for two reasons. One, once the information exists there will probably be pressure to make it public. Two, some states are already headed in that direction. For example, the New York legislature has passed something call the New York LLC Transparency Act, requiring public disclosure of the owners of limited liability companies.

Exceptions

Twenty-three kinds of entities are exempt from the CTA. They include (i) “large operating companies,” defined as a company with more than 20 full-time employees, that has filed income tax returns demonstrating more than $5,000,000 in gross receipts or sales and has an operating presence at a physical office within the United States; (ii) companies required to report under section 12 of the Exchange Act; (iii) investment advisers; (iv) public accounting firms registered under Sarbanes-Oxley;  and (v) tax-exempt entities,.

Click here for a list of the 23 exemptions.

Beneficial Owners

A Beneficial Owner is any individual who, directly or indirectly, (i) exercises substantial control over the entity (e.g., LLC Manager, Corporate Officer, etc.) or (ii) owns or controls twenty-five (25%) percent or more of the ownership interests in a Reporting Company. 

An individual exercises substantial control over a Reporting Company if he or she (i) is a senior officer; (ii) has authority to appoint or remove certain officers or a majority of directors of the Reporting Company; (iii) is an important decision-maker; or (iv) has any other form of substantial control over the Reporting Company. That’s very broad!

If the shares or interest of a Reporting Company are held by a trust, the Beneficial Owner of the Reporting Company could be (i) the Grantor or Settlor of the trust who has a right to revoke the trust or withdraw assets, (ii) the Trustee or person holding authority to dispose of trust assets, or (iii) a sole beneficiary who is the recipient of income and principal, or a beneficiary who has the right to demand distribution or withdraw substantially all assets from the trust. 

The definition of Beneficial Owners includes exceptions for minor children,  non-senior employees, and an individual whose only interest in a corporation, LLC, or other similar entity is through a right of inheritance. 

Company Applicant

A Company Applicant is an individual who directly files or is primarily responsible for the filing of the document that creates or registers the company. Each Reporting Company is required to report at least one Company Applicant, and at most two.

Example:  Individual A is creating a new company. Individual A prepares the necessary documents to create the company and files them with the relevant office, either in person or using a self-service online portal. No one else is involved in preparing, directing, or making the filing. Individual A is the Company Applicant and should be included in the report.

Example: Individual A is creating a company. Individual A prepares the necessary documents to create the company and directs individual B to file the documents with the relevant office. Individual B then directly files the documents that create the company. Individual A and B are Company Applicant and both should be included in the report.

The requirement to name Company Applicants applies only to Reporting Companies formed or registered on or after January 1, 2024. 

Information Required 

The Reporting Company must provide the following information about itself:

  1. Legal name, trade name and d/b/a;
  2. Address of principal place of business;
  3. The State, Tribal or foreign jurisdiction of formation or registration of the Reporting Company; and
  4. IRS Tax ID Number

The Reporting Company must provide the following information for each Beneficial Owner and each Company Applicant:

  1. Full Legal Name;
  2. Date of Birth;
  3. Current residential or business street address; and
  4. A Unique identifying number from an acceptable identification document (passport, driver’s license, etc.), or a FinCEN Identifier.

Deadline for Filing

Reporting Companies created or registered to do business on or after January 1, 2024, must file a report with FinCEN within 30 days after receiving notice of the company’s creation or registration. Reporting Companies formed or registered before January 1, 2024, have until January 1, 2025.

******

For more information, please contact Chimuanya A. Osuoha, Esq. at cosuoha@lexnovalaw.com or call 856-382-8452. We look forward to being of service. 

Artificial Intelligencer and crowdfunding

Artificial Intelligence And Crowdfunding Law

On By crowdfundattnyIn AILeave a comment

Like everyone else, I was shocked by the launch of ChatGPT. And like everyone else, I believed lawyers would be first on the chopping block. But I now have a far more optimistic view. I think AI will have a far more nuanced and ultimately beneficial effect for lawyers and their clients, including but not limited to Crowdfunding clients.

At first, I thought lawyers (or non-lawyers, gasp!) could type a question into ChatGPT and get a fully-formed legal product, whether a brief, a memo, a contract, or an obnoxious letter. But it turned out that neither ChatGPT nor its imitators is close to that, and I doubt they ever will be. 

Rather than crashing down the walls, AI is entering the legal profession through the front door. Lawyers are not interfacing with AI directly, by typing prompts into ChatGPT. Instead, the AI is being intermediated by existing legal resources. Through subscription, lawyers have access to extremely powerful online resources like the research tools at Westlaw and the high-quality legal forms at Practical Law. These services are themselves incorporating AI into their products, the same way Microsoft is incorporating AI into Office.

Today, for example, I can upload an Asset Purchase Agreement and get back all sorts of comments – what provisions are missing, as compared to a complete Asset Purchase Agreement, what provisions I should consider adding or deleting depending on whether I represent the buyer or seller, what’s “normal” for a given issue, correcting cross-references, letting me know which capitalized terms haven’t been defined, lots of other things. And I know that these comments and suggestions are coming, ultimately, from some of the best M&A lawyers in the country.

The AI is being intermediated by experts, who are using their experience and brains. In this way AI is not so much revolutionary as another step, if a large step, in the continuing evolution of legal resources.

Lawyers are using AI without even knowing it’s AI. And that’s perfectly normal. How many of us, flipping a light switch, think about electrons?

The result should be to make it easier for lawyers to produce a better product. Or to put it differently, to make high-quality legal work cheaper per hour.

I remember when lawyers thought email and fax machines would give them more leisure time and were shocked when they had the opposite effect. Email and fax machines allowed – actually, forced – lawyers to do more work. Rather than send a document overnight (itself an innovation) and wait for a response, the response was immediate.

The same will be true for AI, in my opinion. AI isn’t going to make lawyers redundant. Instead, with AI driving down the cost of a high-quality contract, existing clients will have more of their work done by lawyers, rather than trying to piece something together themselves, and people who have never used a lawyer will be able to afford one. The overall quality of legal work will rise, benefiting everyone.

Ever seen Apple’s original license agreement with Microsoft? The agreement was so awful, it basically allowed Microsoft to steal the GUI and launch Windows. And I am 100% sure the contract was so awful because a business guy at Apple wasn’t allowed to spend money on a lawyer.

You can see how this will translate to Crowdfunding. Upload a Form C and the AI will tell you what’s missing and suggest corrections and replacements. Upload the Y Combinator SAFE and the AI will tell you “Please read Mark Roderick’s blog post explaining why the Y Combinator form has to be changed for Reg CF.” Unfortunately, the Form Cs and other legal documents used for most Reg CF campaigns today are awful, like the Apple license agreement. I think AI will improve the quality of those documents and at the same time make Reg CF more accessible to more people. 

That’s a huge win.

Questions? Let me know.

Why I’m Grateful This Thanksgiving

On By crowdfundattnyIn Uncategorized2 Comments
William Bradford leader of the pilgrims

My 10th-great grandfather was William Bradford, the leader of the Pilgrims. I’m grateful that he and his band of religious refugees made the trip and were saved from starvation by the native population.

I’m grateful for the wisdom of the American people and the resilience of their institutions.

I’m thankful for a culture that rewards risk-taking and innovation and that is slowly, haltingly, inexorably freeing itself of the prejudices of our collective past.

I’m grateful for American entrepreneurs who endlessly question the present and invent the future.

I’m grateful I declined an invitation to sit on OpenAI’s Board.

I’m grateful – I’m not joking – to the SEC for providing oversight for the most complex, dynamic, trusted capital markets in the world.

I’m grateful that FINRA. . . .

I’m grateful to my colleagues at Lex Nova Law for helping to build a flexible, modern law firm.

I’m grateful to live in a diverse, changing, sometimes-chaotic country where it often seems we disagree about everything (we don’t). Like others, I worry that so many Americans have chosen alternative realities and conspiracy theories, but I have faith that these afflictions, like others in our history, will prove temporary.

I’m grateful that even while the voices of hate are the loudest, those who yearn for peace – the majority – refuse to be drowned out.

I’m grateful that people can change their minds.

I’m grateful to participate in the fundamental rethinking of capitalism called Crowdfunding, making capital available where it has never been available before and making great investment opportunities available to more and more Americans.

I’m grateful to everyone in the Crowdfunding ecosystem, especially to Doug Ellenoff and others who worked to make the JOBS Act a reality.

I’m grateful for my clients, a diverse, energetic, endlessly-creative group of entrepreneurs who are making America better and in the process making my life infinitely more rewarding.

While complaining that my health insurance premiums went up again, I’m grateful they have not dropped to zero.

Thanks for reading everyone! I hope you enjoy your Thanksgiving as much as I intend to enjoy mine. As always, contact me if you have any questions.

MARK

financial statements in crowdfunding

Whose Financial Statements?

On By crowdfundattnyIn Filing Financial Statements & Other Reports, Reg CF4 Comments

Reg CF requires financial statements. To refresh your memory:

Those thresholds are based on the maximum you’re trying to raise. So if your “target amount” is $600,000 but you’re trying to raise up to $900,000, and this is your second Reg CF offering, you need audited statements. 

Now suppose you conducted your business as a sole proprietorship or an LLC until six months ago, when someone in Silicon Valley told you to convert to a C corporation. Your sole proprietorship or your LLC is a “predecessor” of your C corporation within the meaning of 17 CFR §230.405. Hence, under the Reg CF rules, your financial statements should include the results of the sole proprietorship or LLC. Which makes sense, given the purpose of the disclosure rules.

The same is true if your company intends to acquire another company. If you’re raising money to buy TargetCo Inc. then TargetCo Inc. is a “predecessor” of your company for purposes of Reg CF. Hence, you should include the financial statements of TargetCo Inc. Which also makes sense.

Especially for small companies, financial statements represent one of the biggest impediments to Reg CF. The rules around predecessors make the impediment that much higher.

Questions? Let me know.

Republican Dysfunction Could Benefit Crowdfunding

Republican Dysfunction Could Benefit Crowdfunding — REALLY

On By crowdfundattnyIn JOBS ActLeave a comment

During my lifetime we’ve never seen political dysfunction like the dysfunction we’re seeing among House Republicans. Coming just as American leadership could be most helpful, the dysfunction is dangerous, a national embarrassment, all that and much more. Yet it might prove good for Crowdfunding.

An ally of Representative Kevin McCarthy, Representative Patrick T. McHenry of North Carolina was designated “interim Speaker” when McCarthy was dethroned. Nobody knows what “interim Speaker” means or what he or she can do, but now, with Republicans unable to agree on an actual Speaker and no other way out of the cul-de-sac, the idea is circulating to give Rep. McHenry some real power and try to run the place. 

Unprecedented? Sure. But so is the dysfunction among Republicans.

Well, it just so happens that Rep. McHenry was the leading proponent of the JOBS Act, the 2012 law that launched Crowdfunding in all its current forms. Ever since, he has also been a leading proponent of improving the law, making it easier for entrepreneurs to raise capital and for ordinary Americans to participate.

Crowdfunding isn’t exactly high up on the list of priorities for either party. But when you’re Speaker of the House of Representative, or “interim Speaker with special powers,” you get to do stuff. If Rep. McHenry holds his position, I wouldn’t be shocked to see changes to the JOBS Act attached to other legislation, even a bill to help Israel and Ukraine.

To quote someone else, there are two things you never want to see being made:  sausage and law. If the dysfunction among Republicans can help Crowdfunding and the American economy, so be it.

Questions? Let me know.

Securities Exchange Commission

SEC Adopts Final Rules For Private Advisers And Stresses Fiduciary Obligations

On By crowdfundattnyIn Private Fund Advisors, SECLeave a comment

Last year the SEC proposed new rules for private fund advisers. After public comment the SEC just adopted final rules.

Some of the new rules apply only to investment advisers required to be registered with the SEC. Others apply to all investment advisers, including so-called “private fund advisers.” I’m going to focus on the latter set of rules.

NOTE:  The new rules apply more broadly than you might think:

EXAMPLE:  Nikki Chilandra forms an LLC of which she is the sole manager, raises money from her private network of investors (no more than 100), and uses the money to buy a limited partnership interest in one real estate deal. The LLC is a private fund, and Nikki is likely a private fund adviser subject to the new rules.

Here’s a chart comparing the proposed rules with the final rules:

TopicProposed RuleFinal Rule
Charging for Services Not PerformedAn adviser can’t charge for services not provided. For example, if an asset is sold, the adviser can’t charge for the advisory fees that would have been due over the next two years.The final rules do not include this explicit provision. But that’s only because, according to the SEC, advisers are already prohibited from charging for services not performed because of their fiduciary obligations.
Charging for Compliance CostsAn adviser can’t charge the fund for expenses incurred in a regulatory examination of the adviser.The adviser may charge for these expenses with majority consent, unless the investigation results in sanctions under the Investment Advisers Act.
Reducing Clawback for TaxesAn advisor can’t reduce her clawback by the amount of any taxes.The adviser may reduce her clawback for taxes if she notifies investors within 45 days after the end of the quarter in which the clawback occurs.
Limiting Adviser LiabilityAn adviser can’t limit her liability for a breach of fiduciary duty, willful misfeasance, bad faith, recklessness, or even negligence.The final rules do not include this explicit provision. But the SEC explains that, in its view, the provision isn’t needed in light of the fiduciary and anti-fraud obligations already imposed on advisers under the Investment Advisers Act which, according to the SEC, may not be waived by contract (e.g., in an LLC Agreement).
Allocation of Fees Among FundsAn adviser can’t allocate fees among funds on a non-pro rata basis.The adviser may allocate fees on a different basis if (i) the allocation is fair and equitable under the circumstances and (ii) before charging or allocating the fees, the adviser notifies investors, explaining why it is fair and equitable.
Borrowing from FundAn adviser can’t borrow money from the fund.The adviser may borrow money with majority consent.
Preferential Treatment for Redemptions and InformationAn adviser can’t give preferential rights to redemption or preferential information rights to some investors if it would have a material negative effect on other investors.Both are allowed if the same rights are given to all investors (which makes the treatment non-preferential).
Preferential Economic TreatmentAn adviser can’t give other preferential economic rights to some investors without full disclosure to all investors.Preferential treatment is allowed with full disclosure (i) before an investor invests, (ii) when the fundraising period has ended, and (iii) annually.

In my opinion, the most important feature of the new rules isn’t the new rules themselves but the SEC’s statements concerning the fiduciary obligations of investment advisers. The SEC believes that all investment advisers have a duty of care and a duty of loyalty that cannot be waived by contract and can be liable for their negligence, no matter what the contract says.

Questions? Let me know.