Elimination of the Ban on General Solicitation and General Advertising
On July 10, 2013, the Securities and Exchange Commission (the "SEC") adopted an amendment to Rule 506 of Regulation D under the Securities Act of 1933 (the "Securities Act") to implement section 201(a) of the Jumpstart Our Business Startups Act (the "JOBS Act"). The amendment permits issuers such as hedge funds, UCITS funds, private equity funds, and venture capital funds (collectively, "private funds") 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 issuers take reasonable steps to verify that such purchasers are accredited investors. General solicitation or advertising may include, but not be limited to, use of advertisements in newspapers or industry magazines, radio or television, and the issuer’s (or private fund sponsor’s) website. The amendment also includes a non-exclusive list of methods that issuers may use to satisfy the verification requirement for purchasers who are natural persons.
Although section 201(a)(1) of the JOBS Act makes no specific reference to private funds, the SEC noted in the Adopting Release that section 201(b) of the JOBS Act provides that offers and sales exempt under Rule 506, as revised pursuant to section 201(a), shall not be deemed public offerings under the federal securities laws as a result of general advertising or general solicitation. As such, the SEC reaffirmed its view that the effect of section 201(b) is to permit private funds to engage in general solicitation in compliance with new Rule 506(c) without losing either the section 3(c)(1) or section 3(c)(7) exclusion under the Investment Company Act of 1940 (the "Investment Company Act"), notwithstanding the fact that private funds are precluded from relying on either of the foregoing two exclusions if they make a public offering of their securities.
Although Rule 506(c) permits private funds to engage in general advertising, investment advisers to such funds should note that they remain subject to Rule 206(4)-8 under the Investment Advisers Act of 1940 (the "Advisers Act"), which prohibits any investment adviser to a pooled investment vehicle (e.g., a private fund) to (1) make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; or (2) otherwise engage in any act, practice or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle. Additionally, investment advisers to private funds must ensure that any advertisements for such funds comply with Rule 206(4)-1 under the Advisers Act, which governs advertisements by investment advisers, and must comply with various no-action and interpretive letters issued by the SEC regarding advertisements.
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Client Alert 2013-201