JOBS Act: Implications for Private Fund Offerings

In early April 2012, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which significantly eases restrictions on startups and emerging growth companies seeking access to US capital markets.

But startups and small businesses aren’t the only ones who stand to benefit from the JOBS Act. The Act also contains a number of provisions that will directly affect offerings made by hedge, private equity, and venture capital funds.

For your reference, five takeaways from the new rules for private funds:

1. Marketing restrictions will be lifted:

“Of particular importance to investment advisers to private investment funds is Title II of the Act—“Access to Capital for Job Creators”—which directs the Securities and Exchange Commission to amend its rules … in order to eliminate the prohibition against general solicitation or advertising in connection with private placements conducted under Rule 506 of Regulation D (the private placement exemption relied on by most private funds), provided that such offerings satisfy certain specified investor qualification requirements. As a result, many private investment funds may have significantly greater flexibility to market the fund to qualified investors.” (The JOBS Act: Implications for Private Fund Advisers April 24, 2012 by Foley Hoag LLP)

2. The new rules only apply when all investors are accredited:

“One of the important things to note with respect to the provisions of the JOBS Act is that they can only market more freely if all of the investors of the fund are accredited investors. If they have non-accredited investors coming into the fund, then they cannot use these more liberal advertising means in order to solicit investors.” (Hedge Fund Marketing and the JOBS Act by MarketsReformWiki)

3. Crowdfunding will not be permitted:

“Of note for private funds, crowdfunding under Section 4(6) is not available to any investment company, as defined in the Company Act, or any company excluded from such definition by Section 3(b) or 3(c) of the Company Act. Most private funds rely on these exclusions and will be unable to avail themselves of crowdfunding under Section 4(6) of the Securities Act. Additionally, since the monetary limits relating to permitted crowdfunding are relatively low, these provisions would not be practical for most fund managers.” (President Signs Jumpstart Our Business Startups Act: Certain Restrictions on Marketing Private Funds Eased by Lowenstein Sandler PC)

4. Standard disclosure obligations stay the same:

“… it must be borne in mind that the JOBS Act does not modify in any way the anti-fraud provisions of the securities laws, including disclosure obligations that are applicable to issuers and third-parties engaged in a securities offering and sale, such as full and fair disclosure of the risks presented in connection with an investment in a particular fund or its trading strategies, etc.” (Jumpstart Our Business Startups Act – Implications for Sponsors of Venture Capital, Private Equity and Hedge Funds by Orrick, Herrington & Sutcliffe LLP)

5. Important questions remain:

“The effect of the JOBS Act on advisers to private funds relying on certain exemptions from registering with the Commodity Futures Trading Commission (the “CFTC”) appears to be less clear. For example, both CFTC Regulations 4.13(a)(3) and 4.7 generally require the operators of private funds relying on such exemptions to offer and sell the fund interests without marketing to the public in the United States. Therefore, operators of private funds relying on such exemptions still may be subject to restrictions on marketing unless and until the CFTC or its staff clarifies the effect of the JOBS Act on these exemptions.” (Private Offerings under the JOBS Act by K&L Gates LLP)

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