What Should Private Funds Expect After JOBS Act Is Signed?
April 4, 2012 § 1 Comment
Much of the press coverage of the JOBS Act, justifiably, has addressed the Act’s crowdfunding provisions. For private fund managers, however, the most important development is removal of Regulation D’s prohibition on general solicitation and advertising when privately offering securities to accredited investors. The prohibition greatly limits fund managers’ ability to seek out prospective investors, respond to press inquiries and engage in other marketing activities.
In addition to simply lifting the ban on general solicitation and advertising, however, the JOBS Act instructs the SEC to determine methods that issuers must use to verify that investors are, in fact, accredited. Given the SEC’s earlier public criticism of the Act, we may see the agency adopt rules or interpretations that greatly limit how certain issuers (e.g., hedge funds and other private funds) ultimately are able to market their offerings.
After enactment of the Act–expected to be signed by President Obama at any time–the SEC will have only 90 days to make the required rule changes. Given this short timeframe, and the SEC’s on-going Dodd-Frank rule-making mandates, it is most likely the SEC will do nothing more than make the minimal required changes to Regulation D. It is also possible, however, the SEC simply lets the deadline pass without adopted any changes. The Commission has already missed a number of Dodd-Frank rule-making deadlines and SEC Commissioners are on record as supportive of the agency “moving deliberately” when adopting new rules. This could mean limbo for issuers beginning in early July if the SEC has not yet taken action.
A separate concern is what the SEC will do when carrying out the JOBS Act provision that requires it to determine methods that will require issuers to verify that their investors are, in fact, accredited when conducting Regulation D offerings. This could mean that–in exchange for greater latitude in marketing–private fund managers will have new and heightened investor due diligence, paperwork or even reporting requirements.
At this point, it seems certain the SEC does not have any proposed rules drafted and ready to go. The agency has long been against removing the ban on general solicitation and advertising before it was forced upon them by the JOBS Act. Given the SEC’s current powers to prohibit fraudulent activity and disclosures as well its power to regulate investment adviser advertising, we do expect future rules will attempt to regulate at least some limits on how private funds in particular will ultimately be able to market their funds.
- Senate Lifts Ban on General Solicitation and Advertising (prior post)
- Will JOBS Act Repeal Ban on General Solicitation? (prior post)
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.