On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act (H.R. 3606). The JOBS Act is intended to stimulate job creation by facilitating access to capital markets for emerging growth companies. Of particular interest to private funds and their managers is the provision of the JOBS Act which eliminates the ban on general solicitation and general advertising under Regulation D promulgated under the U.S. Securities Act of 1933. The Act also increases the threshold for becoming a reporting company under Section 12(g) of the Securities Exchange Act of 1934, from 500 shareholders of record to either: (a) 2,000 shareholders of record; or (b) 500 shareholders of record that are not accredited investors. The Act also amends Section 12(g)(5) to provide that the definition of “held of record” would not include securities held by persons who received those securities under employee compensation plans in transactions exempted from the registration requirements of Section 5 of the Securities Act.
Section 201 of the JOBS Act requires the SEC to, not later than 90 days after the date of the enactment of the Act (i.e., July 4th, 2012), revise Rule 506 of Regulation D to provide that the prohibition against general solicitation or general advertising contained in Rule 502(c) of Regulation D will not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors. Section 201 also requires that the new rules require the issuer (for example, private funds) to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the SEC.
The SEC is currently seeking comments on the JOBS Act rulemaking. We will continue to discuss the practical implications for the private fund industry as the July 4th deadline approaches for SEC rulemaking.