What the JOBS Act Means for Private Offerings

by David Mishel, Nicholas S. Hodge, Kay Gordon, Yusef Alexandrine, and Remsen M. Kinne IV

The JOBS Act contains number of provisions that will directly impact private funds, their advisers, and broker-dealers that participate in private fund offerings which are addressed in this Emerging Issues Analysis.

Excerpt:

The President signed into law the Jumpstart Our Business Startups Act (the "JOBS Act" or the "Act") on April 5, 2012. The Act represents a significant deregulation of private securities offerings and contains a number of provisions that will directly impact private funds, their advisers, and broker-dealers that participate in private fund offerings. This EIA is directed only to those provisions of the Act. Specifically, the JOBS Act:

  • requires the SEC to amend Rule 506 of Regulation D within 90 days of enactment to eliminate the prohibition on general solicitation and general advertising contained in Rule 503(c) on private offerings made pursuant to Rule 506, including offerings by hedge funds and private equity funds, as a condition of the safe harbor for exemption from registration under Section 4(2) of the Securities Act of 1933, as amended ("Securities Act"), provided that all purchasers are "accredited investors."
  • requires the SEC to further amend Rule 506 to require an issuer relying on that Rule to take reasonable steps to verify that the purchasers are accredited investors using methods to be determined by the SEC.
  • provides that the SEC shall, in the same period, revise Rule 144A under the Securities Act to provide that securities sold under the revised rule may be offered to persons other than qualified institutional buyers ("QIBS"), including by means of general solicitation and general advertising, provided that securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe are QIBS.
  • amends Section 4 of the Securities Act to provide that offers and sales that are exempt under Rule 506, as amended pursuant to the JOBS Act, "shall not be deemed public offerings under the Federal securities laws as a result of general solicitation or general advertising."
  • amends Section 4 of the Securities Act to provide that, with respect to securities offered and sold in compliance with Rule 506 of Regulation D, certain persons performing certain functions shall not be subject to registration as broker-dealers pursuant to Section 15(a)(1) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), solely because of the performance of those functions, subject to certain conditions.
  • increases the Section 12(g) threshold for registration under the Exchange Act to 2,000 record holders or 500 record holder, non-accredited investors, in both cases excluding securities held by persons who acquired the securities pursuant to an employee compensation plan exempt from registration under Section 5 of the Securities Act.

Regulation D Offerings of Private Fund Interests under Rule 506

The JOBS Act will eliminate restrictions on the manner of offering for private placements sold to accredited investors pursuant to Rule 506 of Regulation D. Once the SEC has amended Regulation D, private funds will be permitted to conduct Rule 506 private placements in virtually any manner, including the use of general solicitation and general advertising, provided purchasers are exclusively accredited investors. This would include, but not be limited to, the use of their and other web sites, as well as other media. Developing substantive relationships with prospective investors through questionnaires or other means prior to showing them deal specific information presumably no longer will be required. The prohibition on general solicitation and general advertising apparently still will apply to Rule 506 offerings if there are any sales to non-accredited investors unless the SEC eliminates such prohibition, which we think unlikely.

Issuers relying on the Rule 506 of Regulation D safe harbor still will have to take steps to determine whether the purchasers are accredited. As set forth above, the JOBS Act requires the SEC to adopt rules to require the issuer to take reasonable steps to verify that purchasers are accredited by methods determined by the SEC. Currently, the requirement under Rule 501 of Regulation D is that, at the time of sale, the investor be accredited or that the issuer reasonably believes the investor to be accredited. As set forth above, the reasonable belief standard still applies to the determination of whether purchasers are QIBS under the amended Rule 144A. Reasonable belief traditionally has been based on questionnaires and subscription agreements. The SEC may require something further under Rule 506 in addition to the traditional questionnaires and subscription agreements in determining methods to verify that purchasers are accredited.

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David Mishel is of counsel at K&L Gates LLP. Mr. Mishel practices from K&L Gates' San Francisco office and is a member of the Securities Enforcement group. He practices in the following areas: broker-dealer, investment adviser and securities regulation and enforcement, and general corporate and securities business transactions.

Nicholas S. Hodge is a partner at K&L Gates LLP. Mr. Hodge concentrates his practice in securities law with a focus on investment management, hedge funds, private equity funds, real estate investment trusts and partnerships, timber funds, complex partnership reorganizations, and mergers and acquisitions. He has extensive experience in public and private offerings of securities, SEC and FINRA regulatory requirements, and Investment Advisers Act compliance. Mr. Hodge represents numerous domestic and offshore hedge funds, ranging from startup funds to major fund complexes.

Kay Gordon is a partner at K&L Gates. She practices in the firm's New York office and concentrates her work in the Investment Management practice, with a particular emphasis on hedge funds, private equity funds and compliance-related matters.

Yusef Alexandrine is an associate in K&L Gates' San Francisco office and a member of the Investment Management practice group. He advises participants in the financial services industry, including investment advisers to hedge funds, private equity funds, and venture capital funds, registered open-end and closed-end funds, exchange traded funds and mutual funds, as well as mutual fund independent directors, investment banks and broker-dealers, on regulatory, transactional and counseling matters involving the securities and commodities laws. He also regularly provides advice with respect to exemptions, no-action letters, and other forms of regulatory relief. In addition, he advises clients on state blue sky issues, particularly California securities law regulatory issues.

Remsen M. Kinne IV is a partner in K&L Gates' San Francisco office. A member of the corporate practice group, he represents private and public companies in structuring, negotiating and documenting international and domestic investment, acquisition, financing and commercial transactions. He is experienced in the purchases and sales of assets, stock and merger acquisitions, startup, venture, strategic partner and private equity investments, registered and unregistered securities offerings, formation and operation of joint ventures and multijurisdictional holding company structures, and licensing and distribution matters.

This Emerging Issues Analysis is for informational purposes and does not contain or convey legal advice. 2012 K&L Gates LLP, All Rights Reserved.