On July 10 the Securities and Exchange Commission (SEC) adopted implementing regulations under the JOBS Act of 2012 (concerning the relaxation of the prohibitions against “general solicitations” under Regulation D under the Securities Act of 1933) and the implementation of various disqualification and so-called bad-actor provisions imposed by the Dodd-Frank Act of 2010. The SEC also took the opportunity to propose new Form D filing requirements and proposed extending Rule 156 mutual fund disclosure requirements to private investment funds.
As required by the JOBS Act, these new regulations modify the long-standing limits on issuers of securities in private transactions that had prevented such issuers from engaging in public solicitations regarding those securities. Small, closely held businesses that are trying to raise capital are expected to be the primary beneficiaries of the change, as are private funds. Under the previously applicable rules, private companies that were in a fund-raising mode were precluded from having Web sites that were not password-protected; they needed to limit their solicitations to persons with whom they had preexisting relationships; and they needed to police publicly available information lest they be deemed to have engaged in a general solicitation. Of course, this necessitated what the popular press had derisively dubbed the “dark shroud of secrecy” surrounding such offerings. The original authors of Regulation D had intended to protect the “unsophisticated” from being bombarded with offerings that they were not equipped to evaluate.
The “new and JOBS Act-improved” Regulation D takes a different approach. While preserving the ability of an issuer to “do it the old fashioned way,” and not engage in a public solicitation, the new rule offers an alternative.
Now, once the rules become effective, the primary limitation will be on to whom the issuer actually sells its securities – the issuer may only sell to accredited investors that the issuer has verified, through reasonable inquiry, are in fact accredited.
- It is expected that smaller, early-stage companies will be able to gather assets more efficiently as a result of the change. It is also anticipated that the new availability of information will open new investment opportunities, and perhaps reduce costs (placement fees, etc.).
- Will we see billboards and Super Bowl ads? Probably not. The issuers can still only sell to accredited investors and that is still a relatively small portion of the general population. Will we see targeted ads in trade journals and publications read by high-net-worth individuals? Most likely. Will there be an increase in Web traffic and Web solicitations? Absolutely, as issuers and private funds make their financial and performance data generally available on Web sites that are not password-protected.
- Of course, the anti-fraud laws still apply. This should not be the wild, wild west, as the SEC has promised that it will watch very closely as this experiment unfolds.
- We anticipate a period of disintermediation as issuers try to “leap frog” gatekeepers and go directly to institutional decision-makers and asset allocators. We also anticipate an increased need for registered advisors who know the small and micro-cap spaces to help investors sort through the deluge of information that will most assuredly come.
Gregory J. Nowak
For additional information, including relevant publications, seminars, and webinars, please visit Pepper's JOBS Act Resource Center.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.