United States: Congress Passes JOBS Act

Legislation Eases Regulations Governing Offerings of Private Funds

On March 27, 2012, Congress passed the Jumpstart Our Business Startups Act, H.R. 3606, as amended (the "JOBS Act"). President Obama is expected to sign the bill shortly. The JOBS Act, which combines six different bills, is intended to make it easier for small businesses to access capital. Of particular interest to the funds industry, the JOBS Act eases the regulatory framework for private offerings by (a) removing the prohibitions against general solicitation and general advertising for securities offerings exempt from registration under Rule 506 of Regulation D, so long as all purchasers of such securities are accredited investors, and (b) raising the equityholder threshold that triggers public reporting in Section 12(g) of the Securities and Exchange Act of 1934 (the "Exchange Act") from 500 persons to either (i) 2,000 persons in total or (ii) 500 persons who are not accredited investors.1 Once signed into law and implemented by the Securities and Exchange Commission (the "SEC"), the JOBS Act is expected to substantially ease restrictions on advertising and other offering practices that have historically been imposed on private fund sponsors, including sponsors of private equity funds, hedge funds and funds of funds, conducting offerings in the United States.

Removal of General Solicitation Prohibition under Regulation D

The JOBS Act directs the SEC to revise Rule 506 of Regulation D, promulgated under Section 4(2) of the Securities Act of 1933. Under Rule 506, the obligation to register the offer and sale of securities does not apply to an issuer so long as sales are made to no more than 35 persons (excluding accredited investors) regardless of the dollar amount of the offering. Currently, among the general conditions an issuer must meet for any Regulation D offering, Rule 502(c) prohibits an issuer relying on a Rule 506 exemption from using any form of "general solicitation or general advertising" to market the securities. While the current rules do not specifically define "general solicitation" or "general advertising," Rule 502(c) states broadly that these may include, but are not limited to, "any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and any seminar or meeting whose attendees have been invited by any general solicitation or general advertising."

The JOBS Act would direct the SEC to remove the prohibition against general solicitation and general advertising as applied to offers and sales of securities made pursuant to Rule 506, so long as all purchasers of the securities are "accredited investors." The JOBS Act also directs the SEC to require an issuer relying on Rule 506 to take reasonable steps to verify that purchasers of the securities are in fact "accredited investors," and to establish by rule methods by which issuers may so verify investors' status. In addition, the JOBS Act would exempt persons from registration as brokers and dealers who would otherwise be subject to registration in connection with a Rule 506 offering solely because "(a) that person maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issuers of such securities, whether online, in person or through any other means; (b) that person or any person associated with that person co-invests in such securities; or (c) that person or any person associated with that person provides ancillary services2 with respect to such securities," provided that any such person is not subject to certain statutory qualifications, receives no compensation in respect of the purchase and sale of such securities, and does not possess customer funds or securities in connection with any such purchase or sale.

This loosening of restrictions under Rule 506 is also relevant to private funds relying on either Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 for exemption from registration under that statute (which includes most private funds offered in the United States), because such exemptions prohibit funds from making a "public offering" of their securities. The JOBS Act provides that offerings pursuant to Rule 506 will not be deemed "public offerings" under the "federal securities laws" as a result of general advertising or general solicitation. Thus, the JOBS Act is ultimately expected to allow a private fund relying on a 3(c)(1) or 3(c)(7) exemption to engage in general solicitation and general advertising. It is possible, however, that SEC rulemaking and guidance in the wake of the JOBS Act will specifically address the application of this provision to the term "public offering" in Sections 3(c)(1) and 3(c)(7).

The practical impact of the changes to be effected by the JOBS Act, assuming no new rulemaking or other guidance to the contrary by the SEC, is that they will allow sponsors of private funds to, amongst other things, issue press releases, be interviewed by the media, communicate information about fund offerings on publicly available websites and social media, and place advertisements during the course of fundraising, provided that, for offerings made under Rule 506, sales are made only to accredited investors. Such sponsors will also be able to solicit capital from investors with whom they do not have a substantive pre-existing relationship.3

Increase in Equityholder Threshold for Public Reporting

In addition to eliminating the prohibitions on general advertising and general solicitation for funds exempt from public reporting, the JOBS Act also increases the equityholder threshold for companies required to register under the Exchange Act. Under the existing framework, a company (including a private fund) that has at least 500 shareholders of record and more than $10 million in assets is required to register under Section 12(g)(1)(A) of the Exchange Act. Once a company has registered under Section 12(g), all of the public company reporting requirements under the Exchange Act apply, including the need to file annual, quarterly, and current reports, proxy statements, and certain transaction reports.

The JOBS Act amends Section 12(g)(1)(A) of the Exchange Act to require that an issuer must register its securities with the SEC when it has total assets exceeding $10 million and a class of equity security that is held of record by either (i) 2,000 persons in total or (ii) 500 persons who are not accredited investors. Section 502 of the JOBS Act further amends Section 12(g)(5) to provide that the definition of "held of record" does not include securities held by persons who received such securities under employee compensation plans.

Further, Section 504 of the JOBS Act directs the SEC to examine its authority to enforce Rule 12g5-1, which defines "held of record," to determine whether new tools are needed to enforce the rule's anti-evasion provisions, and to submit its recommendations to Congress within 120 days of the enactment of the JOBS Act.

This change is helpful to sponsors of private funds, and particularly sponsors of funds that target high net worth individuals (such as funds of funds), because it allows them to organize funds with up to 2,000 accredited investors.

Timing

The JOBS Act does not specifically address when its provisions are intended to be effective. To date, the sponsors of this legislation have not responded to requests for clarification on this point. Nevertheless, once the JOBS Act is enacted, the SEC must amend Rule 506 within 90 days. Based on our experience with SEC rulemaking in connection with the Dodd-Frank Act, it is possible that the SEC may propose new rules within 90 days but not adopt final rules until after this deadline.

Footnotes

1 The JOBS Act also creates a new category of issuers with less than $1 billion in annual gross revenue called "emerging growth companies," removes certain restrictions on "crowdfunding" (i.e., raising capital from many small investors), and increases the threshold for offerings of securities exempt from registration under Regulation A from $5 million to $50 million.

2 "Ancillary services" include "(a) the provision of due diligence services in connection with the offer, sale, purchase or negotiation of such security, so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors; and (b) the provision of standardized documents to the issuers and investors, so long as such person or entity does not negotiate the terms of the issuance for and on behalf of third parties and issuers are not required to use the standardized documents as a condition of using the service."

3 It remains unclear how elimination of the general solicitation restriction at the federal level will affect the application of relevant state "blue sky" exemptions, notwithstanding the pre-emption of these laws as they relate to "covered securities" as a result of the National Securities Markets Improvement Act of 1996. In addition, the JOBS Act does not address, and SEC rulemaking may have to confront, general solicitations in situations in which an offshore offering made pursuant to Regulation S (which prohibits "directed selling efforts" into the United States) is conducted in conjunction with a Regulation D private offering into the United States.

www.ropesgray.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions