JOBS Act is Not a Regulatory Cure-All for Private Funds (PDF-553kb)
JOBS Act is Not a Regulatory Cure-All for Private Funds Author: Kimberly V. Mann
The Jumpstart Our Business Startups Act (JOBS Act or Act), which was signed into law on April 5, 2012, could improve substantially the fundraising prospects for private funds. Elimination of the prohibition against general solicitation and general advertising will increase exposure for private funds and, consequently, the pool of prospective investors. Although the JOBS Act and rules to be adopted in connection with the Act will in some ways revolutionize private offerings, it is important for private funds to keep in mind the restrictions on U.S. private offerings that are unaffected by the JOBS Act.
General partners, managers and sponsors of private funds often struggle with the prohibition against general solicitation and general advertising as they raise new capital. Non-U.S. private funds, in particular, which may not be subject to similar restrictions under local law, must navigate gingerly around the cumbersome prohibitions. Those funds will enjoy benefits of relaxed offering rules, but should not forget the applicable restrictions that remain for private funds that offer interests in and into the United States.
Summary of JOBS Act Revisions Directly Affecting Private Offerings by Private Funds
Below is a summary of the revisions mandated by the JOBS Act that directly affect private offerings by private funds.
- Section 201(a) of the JOBS Act directs the U.S. Securities and Exchange Commission (SEC) to revise Rule 506 of Regulation D under the Securities Act of 1933 (Securities Act) by July 4, 2012 to provide that the prohibition against general solicitation and general advertising does not apply to offers and sales of securities made under Rule 506, provided that all purchasers of the securities are accredited investors. The JOBS Act also directs the SEC to devise methods to be used by issuers to verify whether purchasers of securities are accredited investors, and to require issuers to take reasonable steps using those methods to verify that the purchasers of securities in the offering are accredited investors.
- Section 201(b) of the JOBS Act amended Section 4 of the Securities Act to provide that offers and sales of securities that are exempt under Rule 506 will not be deemed public offerings under the federal securities laws as a result of general advertising or general solicitation. The amendment to Section 4 will be important to private funds that advertise because it will help to preserve the availability of exceptions under Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act, which are relied upon for exemption from registration under the Investment Company Act of 1940.
- Section 201(c) of the JOBS Act provides that, in connection with securities offered and sold in compliance with Rule 506, registration as a broker or dealer under Section 15(a)(1) of the Securities Exchange Act of 1934 (Exchange Act) will not be required solely because a person (or such person’s associates):
- operates data bases, websites or other platforms or mechanisms that (A) permit the offer, sale and purchase of securities or the negotiation of or with respect to securities, or (B) permit general solicitation and general advertising,
- co-invests in the securities or
- provides ancillary services relating to the securities (such as due diligence or standardized documentation).
In each case, the exemption from registration is available only if such person and any associated person (1) receive no compensation in connection with the purchase and sale of the securities, (2) do not have possession of customer funds or securities in connection with the purchase and sale of securities and (3) are not subject to statutory disqualification.
- Section 501 of the JOBS Act increases from 500 to 2,000 the limit on the number of record holders of equity securities that an issuer may have before the issuer is required to register under Section 12(g) of the Exchange Act, so long as the number of record holders that are not accredited investors does not exceed 499.
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