On April 5, 2012 President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law. The other day I blogged about the changes to the general solicitation and advertising rules brought about by the JOBS Act. Today I am focusing on the impact those rule changes will have on hedgefunds, and in particular, smaller hedgefunds.
Summary of JOBS Act Changes Effecting General Solicitation and Advertising of Private Offerings
Title II of the JOBS Act provides that, within 90 days of the passage of the JOBS Act (i.e. July 5, 2012), the SEC will amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors. The JOBS Act directs the SEC to make the same amendment to Rule 144A so long as all purchasers in the Rule 144A offering are qualified institutional buyers. Neither a Rule 506 offering nor a Rule 144A offering will be considered a public offering (i.e. will lose its exemption) by virtue of a general solicitation or general advertising so long as the issuer has taken reasonable steps to verify that purchasers are either accredited investors or qualified institutional buyers, respectively. Since it would be impossible to ensure that only accredited investors, or qualified institutional buyers, receive, review or become aware of general solicitations and advertisements, the rule focuses on ensuring that the purchasers qualify.
The SEC will need to formulate rules to determine what “reasonable steps” will be required from issuers to verify a purchaser’s status as either an accredited investor or a qualified institutional buyer.
JOBS Act Changes Number of Shareholders Requiring Registration
The JOBS Act amends Section 12(g) and Section 15(d) of the Exchange Act as to threshold shareholder requirements and registration and deregistration requirements such that the shareholder threshold before requiring registration and subsequent reporting with the SEC has been increased from 500 to either (a) 2,000 or more, or (b) 500 or more unaccredited shareholders;
Impact on Hedge Funds
The impact on hedge funds is obvious – they can now advertise for both accredited and qualified institutional investors. Moreover, with the increased number of shareholders allowed before registration, a fund qualified for an exemption under Section 3(c)(7) of the Investment Company Act of 1940, can now advertise, and have 1999 accredited shareholders before they would have to register with the SEC and become reporting.
The lift on advertising goes beyond your basic ability to promote on the internet. It is a lift on the ban for general solicitation, advertising and marketing in general. For instance, for the first time, hedgefunds will be able to sponsor sporting events and sporting teams.
One caveat of the new rules is that advertising is only allowed where ALL investors are accredited or qualified institutions. Accordingly, a fund with 35 unaccredited investors, would not be able to advertise, while those unaccredited investors remain in the fund.
Right now, many hedgefunds do not provide any details at all about their investment strategies, historical performance or forecasts of future performance for fear that such open information could be viewed as a solicitation and therefore a violation of the rules. Upon enactment of the new rules (around mid July) that will all change.
Hedge Funds May Discuss Strategies and Performance
Now, not only will hedge funds be able to discuss their strategies, deal and performance in depth on their website, but on a broader scale, amongst each other. Broker dealers will be able to pitch investors with glossy brochures. Open invitation seminars, together with all the trimmings will make a comeback.
Of course the SEC and state anti-fraud rules stay in place (and I expect will be beefed up) as do FDA standard truth in advertising rules.
It is widely agreed that these changes will have a dramatic impact on smaller hedgefunds. Now the big boys turn away investors; the smaller ones now have a way to find them. Established hedgefunds think the idea of advertising is not only ludicrous, but somehow below them – a sign of weakness. Although in the short term, they will not feel the impact, I would bet that in two years’ time, the entire hedge fund landscape will have evolved.
The Author
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.
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