Will JOBS Act Repeal Ban on General Solicitation?
March 20, 2012 § 2 Comments
On March 8, the House overwhelmingly passed the Jumpstart Our Business Startups (JOBS) Act. The Act would allow crowdfunded equity offerings and, more importantly for private fund managers, would remove the ban on general solicitation and advertising from Regulation D.
Repealing the prohibition would vastly increase the ways in which private funds could reach out to prospective investors. The SEC and state regulators meanwhile are concerned that a repeal would open the doors to widespread abuse and investor fraud.
Nearly all private funds rely on Rule 506 of Regulation D to avoid registering the offer and sale of their securities with the SEC. The rationale is that the funds are conducting private offerings only to sophisticated, accredited investors so close regulatory scrutiny is not required. In exchange for a light regulatory touch, Rule 506 prohibits any general advertising or general solicitation to prospective investors.
As most fund managers know, the SEC has never defined what exactly constitutes a “general solicitation.” Typically, the prohibition has prevented private fund managers from providing any information concerning their funds–or even the existence of their funds–from being publicly disseminated through print, media, websites or any other means.
Since its adoption in the early 1980s many have tried without success to relax Regulation D’s prohibition on general solicitation. Most recently, the Managed Funds Association petitioned the SEC to eliminate the prohibition for offerings and sales by private funds. The MFA argued that doing so would enhance existing regulation of private fund offerings and promote economic growth. In addition, the SEC’s own Advisory Committee on Small and Emerging Companies recommended that the SEC “relax or modify” the general solicitation restriction for sales to accredited investors.
The JOBS Act would accomplish exactly what the MFA and the SEC’s Advisory Committee have petitioned and recommended. Advertising and general solicitation would be permitted in connection with offers and sales to accredited investors under Rule 506.
The Act easily passed the House and is scheduled for prompt action by the Senate. In response, the SEC and state securities administrators have mobilized to voice their concerns. Among the arguments raised by SEC Commissioners and the North American Securities Administrators Association are:
- given the history of successful capital formation under Regulation D, issuers may not need to advertise or solicit to raise capital;
- the JOBS Act weakens existing investor safeguards;
- Rule 506 offerings are already “a haven for investment fraud” and passage would create an “opportunity for fraud on a massive scale.”
Even if the Senate passes the JOBS Act as proposed, we are unlikely to see the nightmare scenarios imagined SEC and state regulators. The SEC and states would not be left without any tools to police offerings made by private funds and other issuers. All advertising or solicitations by private fund managers would remain subject to the anti-fraud provisions of the Securities Act, the advertising rules of the Investment Advisers Act and analogous state laws and regulations. For private fund managers, repeal of the general solicitation prohibition would eliminate the uncertainty surrounding how they can legally market their funds and provides the potential to reach wider pools of prospective investors.
- JOBS Act (H.R. 3606)
- MFA Rulemaking Petition to the SEC (January 6, 2012)
- SEC Advisory Committee on Small and Emerging Companies Recommendations (January 6, 2012)
- NASAA Letter to Senate Leaders Opposing JOBS Act (March 12, 2012)
- Speech by SEC Commissioner Luis Aguilar: Investor Protection Is Needed for True Capital Formation (March 16, 2012)
Jack G. Martel is the author of Investment Adviser Law Blog which is devoted to providing information and discussion of interest to investment advisers, private fund managers and others in the financial management industry. Jack is a partner in Ragghianti | Freitas LLP. He has over fifteen years experience in general business and securities transactions with a focus on assisting investment advisers, fund sponsors and managers in all manner of legal, regulatory and compliance issues. Jack can be reached at 415.453.9433.