Investment advisers to private funds should be aware that their activities with respect to acquiring and disposing of interests in portfolio companies on behalf of the funds they manage could raise the suspicions of the Securities and Exchange Commission (SEC), which recently imposed sanctions and a cease-and-desist order against an investment adviser, Blackstreet Capital Management, LLC (BCM), for willfully violating the Securities Exchange Act of 1934 (the Exchange Act), and the adviser's managing member and principal owner for causing that violation.1 In its order, the SEC found that BCM acted as a broker without registering as one with the SEC under the Exchange Act.
At the time of the SEC order, BCM served as the investment adviser to two private equity funds, each of which primarily invested in leveraged buyouts of businesses primarily located in the Eastern U.S. Each fund was governed pursuant to the terms of a limited partnership agreement, which disclosed that BCM may charge transaction-based fees.
According to the SEC order, in lieu of hiring broker-dealers to assist the funds in their purchases and sales of portfolio company securities, BCM provided the funds with these services, which included soliciting deals, identifying buyers and sellers, negotiating and structuring transactions, arranging financing, and executing transactions. The SEC claimed that these activities were brokerage services and that BCM should have been registered with the SEC.2 The SEC also noted that BCM collected at least $1,877,000 in transaction-based compensation for performing the brokerage services.
As a result of the violations under the Exchange Act and the Advisers Act, BCM and its managing member and principal owner were ordered to cease and desist from committing or causing any of the violations and any future violations of the relevant Exchange Act and Advisers Act provisions, and to pay disgorgement, prejudgment interest, and civil monetary penalties. BCM was also censured.
