President Obama signed into law the Jumpstart Our Business Startups Act (“JOBS Act”) which liberalizes the way private placements are conducted and allows general solicitation and general advertising.
Some key aspects of the JOBS Act are:
- It directs the SEC to lift the ban on general solicitation and advertising and amend the text of Rule 506 on private placements. The SEC has 90 days to act. Until the SEC does so, everything remains the same.
- Although the SEC is directed to lift the prohibition, it can, and most likely will, impose limitations to the manner in which private placements are conducted.
- General solicitation and advertising are allowed only if all the investors are accredited. A fund will no longer be able to have up to 35 unaccredited investors. However, it appears that a fund can still have 35 unaccredited investors if it does not wish to engage in general solicitation/advertising.
- The amended rules will require fund managers to take reasonable steps to verify that all investors are accredited. Currently, a fund manager needs to have a “reasonable belief” that its investors are accredited and such reasonable belief is established by customary representations given by investors in questionnaires and subscription documents. This may not be enough going forward and managers may be required to take extra steps to verify the financial status of their investors.
The wording of the final rules will provide clarification. Subject to the conditions of the final rules, advisers to private funds will likely be permitted to:
- Use web sites and social media to advertise;
- Solicit investors in investor meetings;
- Talk to the press;
- Reach out to the public (and no longer need to establish a “pre-existing relationship” with investors);
- Revise provisions in private placement memoranda (“PPMs”) to no longer mandate confidentiality requirements;
- Distribute their PPMs and no longer need to number the PPMs and keep track of recipients.
Note that the JOBS Act states that the sale of securities under the new rules shall not be deemed public offerings under the federal securities laws as a result of general advertising or general solicitation. However, it remains to be seen if the states will take a different view of these offerings.