The Securities and Exchange Commission adoption of a rule to implement a JOBS Act requirement to lift the ban on general solicitation or general advertising for certain private securities offerings is being welcomed by the hedge fund industry.
The final rule approved by the SEC makes changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that the issuer takes reasonable steps to verify that the investors are accredited investors, and that all purchasers of the securities fall within one of the categories of persons who are accredited investors under an existing rule (Rule 501 of Regulation D).
The Hedge Fund Association applauded the SEC’s decision as a necessary modernization of the securities laws.
In a statement, the HFA said: “Fundamentally, we believe that these new rules will increase public transparency regarding the alternative investment industry, including hedge funds; and facilitate capital formation and ultimately enhance the capital markets.”
Though the HFA views this development as generally positive, it’s awaiting publication of the new rules to determine whether particular requirements impose an unnecessary burden on its members. After reviewing the text of the final rules, as well as gathering feedback from members, it will provide a more comprehensive commentary on behalf of the hedge fund industry.
Currently, companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration under Rule 506.
Most of the exemptions from registration prohibit companies from engaging in general solicitation or general advertising - that is, advertising in newspapers or on the Internet among other things - in connection with securities offerings. Rule 506 of Regulation D is the most widely-used exemption from registration.
While issuers will be able to widely solicit and advertise for potential investors, the JOBS Act required the SEC to adopt rules that "require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission." In other words, there is no restriction on who an issuer can solicit, but an issuer faces restrictions on who is permitted to purchase its securities.
“The SEC is requiring issuers who use general solicitations to use objective standards to determine if an accreditation and offers some specific guidance to assist issuers in determining if an investor qualifies as an appropriate investor,” said Richard Heller, an attorney with Thompson Hine. “In addition, it adopted a rule prohibiting ‘bad actors’ such as felons from using Regulation D to offer securities.”
The SEC also is recommending that the Form D be modified to collect additional data and will require the actual filing of offering literature and marketing materials to be submitted with the Form D.
In an offering that qualifies for the Rule 506 exemption, an issuer may raise an unlimited amount of capital from an unlimited number of "accredited investors" and up to 35 non-accredited investors. Under SEC rules, accredited investors are individuals who meet certain minimum income or net worth levels, or certain institutions such as trusts, corporations, or charitable organizations that meet certain minimum asset levels.
