SEC Division of Investment Management staff letter: Lamp Technologies, Inc.

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May 29, 1998
J: V Al:L:;:.~..:L~. J: __._I..1~_L Our Ref. No. 98-123 RESPONSE OF TH OFFICE OF CHIF COUNSEL Lamp Technologies, Inc. DIVISION OF INSTMENT MAAGEMENT File No. 132-3 By letter dated Apri 27, 1998, you request assurance that the staff would not recommend that the Commssion take any enforcement action if certain information concernng privately offered investment companies ("private funds") is posted on a web site administered by Lamp Technologies, Inc. ("Lamp") that is operated as described in your May 6, 1997 letter (the "Original Letter") and the response of the Division of

Investment Management dated May 29, 1997 (the "Original Response"), with the

modifications described below. Specifically, you request assurance that the posting of

information on the web site would not (i) involve any form of general solicitation or

general advertising on behalf of a private fund within the meaning of Rule S02( c) of

Regulation D under the Securities Act of 1933 ("Securities Act"); (ii) constitute a public offering of securities by a private fund within the meaning of
Section 3(c)(1) or Section 3(c)(7) of
the Investment Company Act of 1940 ("Investment Company Act"); or (ii) cause any investment adviser to a private fund to be deemed to be holding itself out generally to the public within the meaning of Section 203(b )(3) of the Investment Advisers Act of 1940 ("Advisers Act"). Facts Lamp is engaged in the business of data processing, softare development, and the creation and maintenance of web sites. Lamp currently operates a web site that contains information concernng private funds, i.e., funds that are excluded from the definition of investment company under Section 3(c)(I) or Section 3(c)(7) of the Investment Company Act and that are privately offered under Regulation D under the Securities Act. i The operation of the web site is described in greater detail in the Original Letter. In the Original Letter, you stated that each subscriber would pay a subscription fee. You also stated that each subscriber would be a "qualified eligible paricipant" as defined in Rule 4.7 under the Commodity Exchange Act ("QEP") and, as a QEP, would have an investment portfolio of at least $2 millon. Further, you stated that the private
Section 3(c)(I) excepts from the definition ofinvestment company any issuer (i)
whose outstanding securities (other than short-term paper) are beneficially owned by not more than 100 persons, and (ii) that is not making and does not presently propose to make a public offering of its securities. Section 3(c)(7) excepts from the defition of investment company any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are "qualfied purchasers" (as defined in Section 2(a)(SI) of the Act), and which is not making and does not at that time propose to make a public offering of such securities.

funds would be structured as limited partnerships or other collective investment vehicles, and that these funds would be privately offered in compliance with Regulation D. You now propose to eliminate the requirements that subscribers pay any set subscription fee and qualify as a QEP . You also now state that the private funds may be structured as domestic or foreign partnerships, limited liability companies, trusts or other entities. Analysis The Commssion has indicated that the placement of private offering materials on an Internet web site, without suffcient procedures to limit access to accredited investors, would be inconsistent with the prohibition against general solicitation or advertising in rule 502(c) of Regulation D.2 In an interpretive letter issued to IPOnet (pub. avaiL. July 26, 1996), the staf of the Division of Corporation Finance stated that the posting of a notice of a private offering on a web site would not be deemed a "general solicitation" or "general advertising" within the meaning of Regulation D when pre-qualification and password-protection procedures designed to limt access to the web site to' accredited investors were in place. As a general matter, if an offer is public for purposes of the Securities Act, then it also would be public for purposes of Section 3(c)(I) and Section 3 (c )(7) of the Investment Company Act. 3 In the Original Response, we stated that, based on the use of procedures designed to limit access to the information on the web site to a select group of accredited investors, we believed that the posting of private fund information on the web site would not constitute a public offering of securities by a private fund within the meaning of Section ",3(c)(I) or Section 3(c)(7). 4 You argue that, in IPOnet, it was only necessaiy that each ';~'~Subscriber be an accredited investor. It was not necessaiy that each subscriber pay a ,c See Use of Electronic Media for Deliveiy Purposes, Securities Act Release No. 1233 (Oct. 6, 1995). See, ~, Gerard Rizzti (pub. avaiL. June 7, 1983) (staff stated that, if an offer is public for purposes of the Securities Act, it also would be public for purposes of the "Investment Company Act). . As noted in the Original Response, however, while access to the web site must be . :, predicated upon satisfying the definition of an accredited investor, private funds that are ;~ stctured in reliance on Section 3(c)(7) would be required to limit sales of securities to .~~~~.. '.. "qualified purchasers," as defined in Section 2(a)(5l) of the Investment Company Act. ~t*::~:::::'~:':':"~".':'~":-:~-:"Qualified purchasers generally must own veiy substantial investments. See,~, Section I; 2(a)(5I)(i) (defing "qualified purchaset' to include a natural person who owns "not less ;~r than $5,000,000 in investments, as defined by the Commssion"). .. 2

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. subscription fee or be a QEP, which you state includes having a $2 millon investment portfolio.s You therefore believe that the elimination of these requirements should not affect the staffs position in the Original Response. We agree that the elimination of these requirements would not affect our position regarding whether the posting of information about private funds on the web site would constitute a public offering of securities by these funds within the meaning of Section 3(c)(I) or Section 3(c)(7) of the Investment Company Act. On this basis, we would not recommend that the Commssion take any enforcement action under Section 7 of the Investment Company Act if Lamp posts information concernng private funds on the web site in the manner described in the Original Letter and your letter dated April 27, 1998. The Division of Corporation Finance has asked us to inform you that, provided that access to the web site continues to be limited exclusively to "accredited investors" within the meang of Rule SO 1 of Regulation D, the Division will not object to the proposed modifications. More specifically, based on the description of such modifications set forth in your letter dated April 27, 1998, the Division sees no reason to alter its 6 previous grant of no-action relief pursuant to the Original Response.

In the Original Response, we also stated that an investment adviser that posted only information about private funds on the web site would not be "holding itself out generally to the public" as an investment adviser within the meaning of
Section 203(b)(3)
of the Advisers Act.7 This position was based on Lamp's use of procedures designed to limit access to the web site information to a select group of accredited investors and its requirement that managers of the private funds agree to post only information related to these funds on the web site and not to offer other servces or products on the site. You ask that we clarify that this position would not be afected if the private funds were structured as domestic or foreign partnerships, limited liabilty companies, trusts or other entities. We agree that our position would not be affected if the private funds were so structred. S We note that the size ofa subscriber's investment portfolio may be relevant to determning whether the subscriber is an accredited investor. See. ~ Rule SOI(a)(S) (defining "accredited investot' to include a natural person whose individual net worth, or joint net worth with that person's spouse, at the time of purchase exceeds $1 millon). 6 In reaffrmng the positions taken in the Original Response, the Divisions express no view regarding the applicabilty of the Commodity Exchange Act to the posting of information about private funds on the web site.
Section 203(b )(3), in pertinent part, provides an exemption from registration for
any investment adviser that during the preceding 12 months had fewer than 15 clients, and that neither holds itself out generally to the public as an investment adviser nor acts as an investment adviser to any registered investment company. 3 7

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Please note that these positions are based on the facts and representations set forth in the Original Letter and your letter dated April 27, 1998. Any different facts or representations may require a different conclusion. ~~.

Senior Counsel
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SIDLEY & AUSTIN
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April 27, 1998
Marin Kimel, Esq.
Senior Counsel
Oflce of the General Counsel

Divisiun or Investment Management
Securiiies l\nd Exchange Coninussion
450 ,Fifth Street, N. W.
Washingtun, D.C. 20549
Bauik ROlD8lek, Esq.
Sp~cial ColiiiscJ ii, Ilivision of

Corporation Finance

Securities and Exchange Commission
.l50 .Fifh Strcet, N. W.
Washingtun, D.C. 20549
Re. Lamp Technologies, Inc,
Revised No-Action Rcoiicst
Gentlemen:
On bt:halforUus ilmls dieiit, Lamp Technologies, i. i. C ("Lamp"), we are writing to reaue~t thallhe Division olIiivestniciil Managemcnt and the Division of Corporation Fimmce coniinn to us thatllicy will not rccommend that. the Securities and Exchange Commission (the "Sneii) take any entorcement action againsi Lamp or any participating bedgc fund manager or inve~tnient adviser if cerLain iibmiaiioii concerning hedge funds is posted on a World Wide Web site named lIedgeScan administered by Lamp, wJuch sile wil be opcfalcd in the ,"anneI' descrihed in our May 6. 1997 no-action request (the "Original Requt:st") iuid the response of the Division ofInveslmenl Management dated May 29. 19()7 (the "Original Response"), with t.he modifications described herein. Specifically, we seek assurancc ihaiihe proposed activity williiot (~) involve llriy lomi or general solicitation or general advertising on behaf of any hedge ñind withiri the meaning of Rul~ 502(c) under the Securities Act of 1 rn) (the "Securities Act"). (b) constitute a public offenngof secliriLi~s by any hedgc fund wiihin the. meaing of Section 1( e)( I) .. s

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Sin i. .. y & "II S l I N
C HlC,AGO

Manin Kimel, Esq,

Humk Romanek, Esq,

April 27, 199~

or Seciion 3(c)(7) ofiJic Investment Company Act of 1940 (tJ1C "Company Act."), or (c) CalLc¡e any Învestmt:nt adviser Lo a participating hedge fund (0 be deemed to be holding itself out generally to ihe-public willun the meaning of Section 20:l(bKl) ofthe Invei-tment Advii-en¡ Act of

1940 (the" Advisers Act"),

Lamp hali adviiied uiiihiil it is èllllCllly oper8ijng HcdgeScan in nil material respects in Llæ iianner described in the Original Request aiid the Original Response. As disciissed recently with Mr. ,Kimel and Mr. Romanek, Lamp wuuld now like l!= change l wo features of HedgeS can , Lamp also' would like to clanfy one point in the Original Rtlsponse. First, I.amp would like to eliminate the requirement that a specific sublicriplion L~e be payable by 1 TedgeScan suhscribers (stal~d as appruximately $SOO/niOtlih in tbe Original Response) T .amp would like the abilty to charge whatever tees it deems appropriate tor H~rJgCSC81. This change is drivcn by marketing col1cems, namely that Lamp needs more pricing Ilc"ibility t.o pmperly market HedgeScan, This pricing change does not reflect any change in the types of subscribers heing ~olicited by Lanip or the purposes ofIIedgeScan. ", The fee requirement was included in the Origial Reque~l as an aùùiLiurial Lactor iii

, restricting. t.he subscriher base to a limited number otmarket professionals and ensuring that subscribers did not join HedgeScan to invest in any paricular hedge fund (and thus ihal qualiìcauon of subscribers by T..mp would not be deemed a solicitation for any parcular fud),

Howeer, we believe that ther are compen~ting factori; that make tli~ fee r&luirernenl ullJlecssary. Specifically, the n,ec:redited investor requirement and 30-day waiting period will limitih~ numbcr wid type of subsc:iibcrs and t.he waiting perit,d and periudic (e.g.. quaitc:rly 01 annual) ftyailahiliry of mom: hedge funds for suhscription should ensure that liubscnbers to H~d);~SC81 do nqt subscribe to invest in ilny paricular fund. We would also note that (I) SEe Rule suei (under which almost all hedge fund sales are made in the United ,States) does not limit the number of accredited investors that niay invest in a Rule 506 private offering. (2) the Division of Corporation Finance 'did not impose any i-pecific fee requirement in the IPOneilelLer (publ. avail. July 2(1. li)l)li) and (3) the "Analysis" section ofthe Original Response (which section tipeilìcs úie basis for each Division's position) does not. mention or appear to rely o.n the tee requirement. Second, Lamp would like to elinunate the requirement that e.1ch subi-criber he a "qualiIierJ digiblc panidpant" ("QEP") as defined iii Commodity Futures Trading Commission Rule: 4.7 (which iiicludes, among other things, R $2 millon investment ponfolio requirement). -This requirement WfiS included in the Original Requei;t because it was contemplated that many paiticipaling hedge fiiids would be exempt commodity pool~ permitted only to accept QEPs as invaors. in fact. however, the participat.ing hedge funds COmlii-t in large par of hedge fund!; whch eit.her are not commodity pools a.t aJl (:;ince they don't use futures contracts) or are non .. ..

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SIDLl:Y & ÅUSTIN CHICJ\GO
Mariin Kimel, Esq.

Blil:k. Romanek, Esq
April 27, 1998

exempt commodity pools (which are not !lUbjeciio the QEP requirement), Hence. the QRP threshold ii; not necessary to accmplish Lamp's objectives. We would also note that the "accredited investorll threshold was dtrUl~d su1lcicnt by the Division ofCnrporation Finance in the JPOnet letter (pub1. avaL. July 26, 1996). Thir4. Lamp would like to dar(y thal the parLicipating hedge fiinds ma.y be stnicturcd as domestic or fcircign limited parLnerships. limited liability companies, trusts or other entit.ies Th,i; ii;i;ue ,arises because the Original Response on page lour noiccihal HedgcSclm "will exclusively concem fiinds !\tnictured as liited parnerships." As a' practical malter, hedge funds

1.1t.ili7.e many fOm1l\ of organization, the limited paitiiei slup OIUY being one such form (albeit the most popular stnicture for domestic hedge funds), The fòrm ur or~n,zaliön should have no

. iiupact on the legal analyi;ii-, 1m lung a: th~ lulli.s oùiclwise làl1 within the description of hedAe

funds in the Original Request and Original Response,

Hccau!ie access,to IIedgeScan wil be restrit,1:ed lu a selecl grC)up ulsubsciibclS whu have been prc-qunlified thrniigh the u:;e of a generic que~1:ionnaire as accredit~d investui~, and for the other reasons noted in nur Original Request, Wl; belit=vu thaL Lhe posting or

, information concerning hedge funds on IledgeScan will not (a) involve any lunn uf general solicitation or Aciicral advertising within the meaning otRule 502(c) under the Securities Acl, (b) consiiiuiea public oftèring of securities within the meaning of Section 3(c)(1) or Set.1Íon 3(c)(7)

ufthe Compa.ny Act, 01 (e) cause any unregist.ered investnient adviser to hold itself out generally

tu the public wiUÙli the incaniiig of Section 203 the Adviser!; Act, We respectfully, (b)(3) of

request your recnfirmation Lhat you wil not recommend t.hat the SEC take any enforcement action on the foregoing basis if Hec~cSc8n is opcfEtcd f1S described 1n the Original Request, as modified herein, Pursuant Lo SEe Relea,.c,c No :i3-6269, we herewith enclose seven copies of this no-action r~qu~sL. We also cnclose herewith copies nfthe Original Request and Original Response. '" s

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S I I) i. I'y & Å I/STIN CHJl.ALO
Martjii Kimel, Esq,
Barak Romanek, Esq,
April 27. 1 l)(J~ you may have
Plea.c:e contact the \indcrsigncd al (312) 853-2140 with any commentiror quest.ions Sincerely, t.f';'.,l''l;~~-~ /;1 )l-t.r Willam D. Kerr WOK:jlg Enc1ot;urci; cc: Mr. Aladin AbughaJ.alch r .amp Technologies, L.L.C. ;' ~~ . , :
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