(Note: This post was originally circulated on August 1, 2012.)
As previously discussed, on April 5, 2012 President Obama signed into law the Jumpstart our Business Startups Act (“JOBS Act”), marking a dramatic shift in the private fund marketing landscape. Notably, the JOBS Act tasks the Securities and Exchange Commission (“SEC”) with removing the prohibition against general solicitation and general advertising in offerings and sales pursuant to Rule 506 under Regulation D of the Securities Act, provided that all of the purchasers of such securities are accredited investors. As such, the JOBS Act will ultimately provide fund managers with a broad array of capital raising opportunities previously unavailable to them.
The JOBS Act established a 90 day deadline for the SEC to release new rules eliminating the general solicitation and advertising ban. However, as expected, the SEC failed to meet the July 4, 2012 deadline (on June 28, 2012 SEC Chair Mary Schapiro testified to Congress that the deadline was unrealistic; the SEC has since announced that it will consider rules to eliminate the ban during its August 22, 2012 open meeting).
With the final rules still in limbo, fund managers are advised to exercise caution with respect to hedge fund marketing practices and avoid “jumping the gun” in anticipation of the forthcoming changes. For example, the use of email blasts, social media, non-password protected website content, etc., should still be considered prohibited marketing activities in connection with a Rule 506 offering.
Furthermore, as a means of additional investor protection, the SEC is expected to adopt certain rules requiring fund managers to reasonably verify that potential investors are accredited (marking a significant departure from the current standard, which only requires issuers to reasonably believe that investors are accredited). However, it remains unclear what specific steps fund managers will be required to take to “verify” qualifying investors, as well as whether the new rules will address the ramifications of continuing to admit non-accredited investors, grandfathering provisions, the anti-fraud provisions of the Securities Act, etc.
Upon release of the SEC’s final rules, fund managers should not only receive clarification as to what constitutes permissible marketing activities and their investor verification obligations, but should also have a clearer idea of the hedge fund marketing landscape in general going forward. In the interim, fund managers should continue to operate under the existing framework and err on the side of caution.
Please feel free to contact us if you have any questions regarding the status of the JOBS Act or its potential impact on hedge fund marketing activities.