JOBS Act Removes Restrictions on Public Offerings of Hedge and Private Equity Funds
Apil 6, 2012
On April 5, 2012 President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”). The JOBS Act directs the Securities and Exchange Commission (the “SEC”) to remove the prohibitions against general solicitation and general advertising for securities offerings exempt from registration under Rule 506 of Regulation D (under the Securities Act of 1933), so long as all purchasers of such securities are accredited investors.
Gutting of Regulation D Solicitation Prohibitions
The JOBS Act directs the SEC to revise Rule 506 of Regulation D. Pursuant to existing Rule 506, the obligation to register the offer and sale of securities (such as hedge fund and private equity interests) does not apply to an issuer so long as (i) sales are made to accredited investors and (ii) the issuer does not use any form of “general solicitation or general advertising” to market the fund securities. Rule 502(c) states that general advertising may include, “any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.”
The JOBS Act directs the SEC to delete the prohibitions against general solicitations and general advertising as applied to offers and sales of securities (including private fund interests) made pursuant to Rule 506, so long as all purchasers of the securities are “accredited investors.” The JOBS Act also orders the SEC to require an issuer relying on Rule 506 to make provisions to verify that purchasers of the securities are “accredited investors” and to create methods by which issuers may so verify investors’ status. Presumably representations in subscription agreements would satisfy the requirement.
Importantly, this removal of Rule 506 is relevant to private funds and their managers relying on either Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 for exemption from registration because both such exemptions prohibit funds from making a “public offering” of their securities. The JOBS Act provides that offerings pursuant to Rule 506 will not be deemed “public offerings” under the “federal securities laws” as a result of general advertising. Therefore, the JOBS Act should allow a private fund relying on a 3(c)(1) or 3(c)(7) exemption to use general advertising. However, it is possible that SEC rulemaking (see timing of rules below) will specifically address the application of this provision to the term “public offering” in Sections 3(c)(1) and 3(c)(7).
Assuming no SEC rulemaking to the contrary, the actual consequence of the amendments to be effected by the JOBS Act is that they will allow managers of hedge and private equity funds to communicate information about fund offerings on publicly available websites and issue press releases during the fundraising provided that the actual sales are made only to accredited investors. Investment advisors will need to revise their compliance materials to reflect the removal of the advertisement prohibitions.
Timing of SEC Rules
The JOBS Act requires the SEC to amend Rule 506 within 90 days of enactment. This is a very fast timeline and it is possible that the SEC may propose new rules within 90 days but not adopt final rules until after this deadline.
For more information regarding these changes, please contact your regular O’Melveny & Myers LLP attorney.