On June 14, 2024, the SEC agreed to settle charges against Twenty Acre Capital LP (“Twenty Acre”), a Pennsylvania-based registered investment adviser, for violations of the Marketing Rule (Advisers Act Rule 206(4)-1) and the pooled investment fund fraud rule (Advisers Act Rule 206(4)-8) for marketing activity beginning in 2021. WIP agreed to a $100,000 fine and to cease and desist from committing or causing further violations of the rules.
Key Takeaway: This was low-hanging fruit for the SEC. Twenty Acre cherry-picked a single investor’s performance record and advertised it as overall performance without disclosing the activity and significant disparity between the fund’s actual performance and the returns experienced by the single investor.
Summary
The facts, as set forth by the SEC, are pretty straightforward. Twenty Acre advised the Twenty Acre Global Master Fund LP (the “Fund”), a hedge fund that primarily invested in publicly traded equities. From November 2021 (the compliance date for the Marketing Rule) and February 2023, Twenty Acre distributed and uploaded pitch decks and fact sheets to prospective investors and third-party databases accessible by prospective investors. In the materials distributed, Twenty Acre presented returns that only applied to a single limited partner as performance of the Fund. The single investor’s performance varied significantly from the Fund’s performance due to certain successful IPO investments being credited to the limited partner’s capital account in a greater proportion than other investor’s capital accounts. The other investors were limited in their IPO participation due to investment restrictions under FINRA Rule 5130 and 5131.
As a result of the cherry-picked performance Twenty Acre advertised 44.8% net returns in January 2022 for the 2021 calendar year period. However, the Fund’s net return in 2021 was actually -5.7%. Twenty Acre did not include any disclosure stating the positive returns shown applied to only one limited partner and did not represent the returns of the Fund.
Violations
As a result of the above, the SEC charged Twenty Acre with willful violations of Section 206(4)-1, the Marketing Rule, and Section 206(4)-8, the pooled investment vehicle rule. The SEC noted that Twenty Acre, after being contacted by the SEC, revised its Marketing policies and procedures, as well as its marketing materials. The SEC’s Order also cited Twenty Acres’s “remedial acts promptly undertaken” and “cooperation afforded” the SEC.
How Trillium Can Help
Marketing Material Review and Process: Marketing material review and commentary is included as part of Trillium’s comprehensive ongoing compliance support. Trillium also helps clients design and implement marketing material review processes through the use of technology to ensure proper records are created and maintained.
Training, Testing and Surveillance: A key component of Trillium’s ongoing compliance support is reviewing your firm’s practices in key risk areas against policies and procedures. Every client receives annual compliance training tailored to key areas of the firm’s compliance program and Code of Ethics with a special focus on current and upcoming areas of risk.