Fund Managers Allowed to Advertise According to New Rules

Additional Regulations Proposed by SEC

The long-awaited JOBS Act proposed regulations which will allow private fund managers to generally solicit investors for a private fund offering were finalized today.  In addition, the SEC proposed additional regulations with respect to offerings in which there has been a general solicitation.

We will be able to provide more detailed information on these developments over the coming days, but for now the following links provide helpful information:

• SEC Adopting Release – Release No. 33-9415; No. 34-69959; No. IA-3624; File No. S7-07-12RIN 3235-AL34; Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings
• SEC Proposing Release – Release No. 33-9416; Release No. 34-69960; Release No. IC-30595; File No. S7-06-13 RIN 3235-AL46;Amendments to Regulation D, Form D and Rule 156 under the Securities Act
• JOBS Act Ban on General Solicitation Lifted for Fund Managers – blog post from Sansome Strategies (compliance firm)

Below is some direct language from the adopting and proposed releases.  Please contact us if you have questions on the releases or how they may relate to a proposed offering.

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Adopting Release (regulation effective 60 days after publishing in Federal Register)

SEC Summary:

The amendment to Rule 506 permits an issuer to engage in general solicitation or general advertising in offering and selling securities pursuant to Rule 506, provided that all purchasers of the securities are accredited investors and the issuer takesreasonable steps to verify thatsuch purchasers are accredited investors. The amendment to Rule 506 also includes a non-exclusive list of methods that issuers may use to satisfy the verification requirement for purchasers who are natural persons. … We are also revising Form D to require issuers to indicate whether they are relying on the provision that permits general solicitation or general advertising in a Rule 506 offering.

New Regulation 506(c)(2)(ii) will read as follows:

The issuer shall take reasonable steps to verify that purchasers of securities sold in any offering under paragraph (c) of this section are accredited investors. The issuer shall be deemed to take reasonable steps to verify if the issuer uses, at its option, one of the following non-exclusive and nonmandatory methods of verifying that a natural person who purchases securities in such offering is an accredited investor; provided, however, that the issuer does not have knowledge that such person is not an accredited investor:

(A) In regard to whether the purchaser is an accredited investor on the basis of income, reviewing any Internal Revenue Service form that reports the purchaser’s income for the two most recent years(including, but not limited to, Form W-2, Form 1099, Schedule K-1 to Form 1065, and Form 1040) and obtaining a written representation from the purchaser that he or she has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year;

(B) In regard to whether the purchaser is an accredited investor on the basis of net worth, reviewing one or more of the following types of documentation dated within the prior three months and obtaining a written representation from the purchaser that all liabilities necessary to make a determination of net worth have been disclosed:

(1) With respect to assets: bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments, and appraisal reports issued by independent third parties; and

(2) With respect to liabilities: a consumer report from at least one of the nationwide consumer reporting agencies; or

(C) …

(D) In regard to any person who purchased securities in an issuer’s Rule 506(b) offering as an accredited investor prior to the effective date of paragraph (c) of this section and continues to hold such securities, for the same issuer’s Rule 506(c) offering, obtaining a certification by such person at the time of sale that he or she qualifies as an accredited investor.

New Regulation Proposal Release (comment period open for 60 days)

SEC Summary:

… the[se] proposed amendments to Regulation D would require the filing of a Form D in Rule 506(c) offerings before the issuer engages in general solicitation; require the filing of a closing amendment to Form D after the termination of any Rule 506 offering; require written general solicitation materials used in Rule 506(c) offerings to include certain legends and other disclosures; require the submission, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the Commission; and disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with Form D filing requirements in a Rule 506 offering. The proposed amendmentsto Form D would require an issuer to include additional information about offerings conducted in reliance on Regulation D. Finally, the proposed amendments to Rule 156 would extend the antifraud guidance contained in the rule to the sales literature of private funds.

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Cole-Frieman & Mallon LLP is a boutique law firm focused on providing legal services to private fund managers.  Bart Mallon can be reached directly at 415-868-5345.