NYPPEX Seeks Protections for Investors and Private Equity Funds Regarding SEC's New Rules

Secondary Private Equity Market Commentary 
by Laurence G. Allen

NYPPEX, one of the world’s leading providers of secondary private market liquidity and data for investors in alternative funds, today announced highlights from its recent comment letter to the U.S. Securities and Exchange Commission regarding the SEC’s proposed new rules for private funds.

Based on its survey to approximately 2,300 institutional and private client limited partners in private equity funds and private fund attorneys, below are recommendations by NYPPEX to the SEC to enhance protections for investors as well as private equity funds.

Regarding the SEC’s proposed rule that GP-Led Secondary Transactions require Fairness Opinions, NYPPEX recommended:

a) an exemption be provided for private funds under $250 million, that a fairness opinion not be required as proposed by the SEC, as a fairness opinion would be cost prohibitive for smaller funds, particularly feeder funds with private client investors that typically incur higher fees and expenses; and,

b) an exemption be provided for private funds that hold a competitive bidding process among 3 or more secondary buyers, that a fairness opinion not be required as proposed by the SEC; and,  

c) fairness opinions include both Terms as well as Price, as GP-led secondary transactions are generally complex even for sophisticated investors to understand.

Regarding the SEC’s proposed rule on Fiduciary and Conflicts Responsibilities for Private Funds, NYPPEX recommended:

a. that private funds should not be bound by state securities regulations that conflict with federal securities regulations.

In general, NYPPEX agrees with the SEC’s proposed new rule that private funds have a fiduciary and conflict of interest duty to follow both state securities regulations and federal securities regulations; provided that a state’s securities regulation does not conflict with a federal securities regulation.

For example, in the State of New York, NYPPEX believes that the Office of the New York Attorney General is under the mistaken view that private fund investments in affiliates are “self-dealing” and fraudulent under the New York State Martin Act – which has an extraordinarily low threshold because it does not require scienter – a showing of knowledge and specific intent to deceive, as is required to establish fraud under common law.

Whereas SEC federal rules 17a-6 and 17d-1, finalized on February 24, 2003, expanded the exemption for investment companies and funds to explicitly permit investments in affiliates.

Accordingly, NYPPEX recommended an exemption be provided to private funds, that if a state and federal securities regulation is in conflict, the federal securities regulation is to preempt the state’s securities regulation.

NYPPEX believes its recommendations to the SEC will provide greater protections to both investors as well as sponsors of private funds.

For further information, please visit www.nyppex.com or contact Investor Relations at NYPPEX by email at ir@nyppex.com or by phone at +1 (914) 305 2825 in the United States, +41 43 508 7280 in Europe or +65 3158 1383 in Asia.

Copyright 2022 NYPPEX Holdings, LLC. All rights reserved.

About NYPPEX Holdings

NYPPEX Holdings operates a global private marketplace that provides secondary liquidity, private capital and data to qualified investors in alternative investment funds and private companies in a fair and ethical manner. Its clients include alternative investment funds, financial institutions, endowments, foundations, institutional investors, family offices, private clients and their respective advisors worldwide.

Since 2004, the NYPPEX QMS™ has been formerly recognized by the U.S. Internal Revenue Service as a Qualified Matching Service for private partnerships though a private letter ruling under Internal Revenue Code §1.7704.

Its private securities are privately offered only to qualified investors through NYPPEX, LLC and only in jurisdictions were permitted. NYPPEX is regulated in the U.S. by the SEC and FINRA. Member FINRA, SPIC.

Disclosure: This information is market commentary by NYPPEX and is not a solicitation of private securities transactions which may only be done through private offering documents and in jurisdictions where permitted. Investors should not rely on the information in this commentary as the basis for making investment decisions. This commentary is provided for informational purposes only. You are strongly encouraged to consult with your own independent advisors regarding any issues discussed in this commentary.  

Private placements are illiquid, speculative and investors may lose their entire investment.