Ready to Take Advantage of JOBS Act Changes? Be Patient
June 6, 2012 § 3 Comments
By now, most private fund managers are aware that the Jumpstart Our Business Startups (JOBS) Act instructed the SEC to remove the ban on general solicitation and advertising from the exemption that most funds rely on when offering their interests to investors. Many managers are anxious to begin advertising and expanding their marketing efforts. Doing so before the SEC issues its final rules, however, is extremely risky for a number of reasons summarized below. We caution managers to hold off until those rules are in place which is expected to be in early July.
- The repeal of the ban on advertising and general solicitation is not effective until new SEC rules are in place. The JOBS Act did not directly repeal the ban; it simply instructed the SEC to do so. Until the SEC acts, nothing has changed. While the JOBS Act directs the SEC to adopt rules by July 5, the SEC could take longer.
- Regulators will be looking for private issuers jumping the gun. The most publicized provisions of the JOBS Act have been the creation of crowdfunding platforms. As with the repeal of the general solicitation ban, before anyone can rely on the JOBS Act’s crowdfunding provisions, however, the SEC must adopt new rules.The SEC and some state regulators have issued alerts and warnings with respect to anyone conducting crowdfunding before the necessary rules are in place. We can expect similar treatment for premature advertising by private funds or other private issuers.
- The SEC still has a great deal of flexibility in adopting the final rules. The JOBS Act leaves a number of issues open and raises additional questions related to how the Act is implemented:
- The JOBS Act would permit advertising in Rule 506 offerings only if the securities are sold exclusively to accredited investors. Rule 506 currently permits up to 35 non-accredited investors. Will issuers that elect not to advertise still be permitted to sell securities to non-accredited investors?
- What are the consequences of selling securities to an investor who later turns out not to be accredited? Is the exemption blown for the entire offering of securities?
- Issuers will be required “to take reasonable steps to verify that purchasers…are accredited investors, using such methods as determined by the [SEC].” The SEC has not indicated what these steps will look like. Presumably it will require more than simply having a reasonable basis to believe an investor is accredited as under current practices.
- Certain commentators–including the Investment Company Institute, the national association of US mutual funds–have urged the SEC to impose content restrictions on the advertising that would be permitted under the new rules. These restrictions could include prohibitions on performance advertising or other limitations. Given previous comments from some SEC Commissioners, such restrictions may very well be included in the final rules.
- What Should Private Funds Expect After JOBS Act Is Signed? (prior post)
- Next Steps for the JOBS Act (prior post)
- Investment Company Institute comment letter (May 21 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.