5 April 2012
The Jumpstart Our Business Startups (JOBS) Act contains two provisions that are particularly beneficial to sponsors of private investment funds.
First, the Act directs the Securities and Exchange Commission to eliminate the prohibition in Regulation D against general solicitation and general advertising, as long as all of the purchasers of the securities are accredited investors. (Regulation D is a regulatory safe harbor from registration under the Securities Act of 1933.) The restriction on general solicitation and advertising is not common in many foreign jurisdictions. The Act states that offers and sales under the revised Regulation D will not be deemed to be public offerings under the federal securities laws as a result of any general advertising or general solicitation. This clarification should allow funds making offerings under revised Regulation D to continue to rely on the exemptions under Sections 3(c)(1) [no more than 100 beneficial owners] and 3(c)(7) [all beneficial owners are qualified purchasers] of the Investment Company Act of 1940.
Second, the Act increases the threshold number of shareholders of record that triggers registration under the Securities Exchange Act of 1934 from 500 persons to 2,000 persons, so long as less than 500 shareholders are not accredited investors. In addition, shareholders who received their securities pursuant to employee compensation plans exempt from registration under Section 5 of the ’33 Act are excluded from the calculation. Registration under the ’34 Act requires 10-Ks, 10-Qs and other public filings and compliance with Sarbanes-Oxley. The 500 shareholder limit was particularly problematic to large hedge funds and other open-end private funds, which will now be able to admit a greater number of investors without registering under the ’34 Act.
Mayer Brown has published a more detailed review of the entire JOBS Act, which also includes new exemptions from the ’33 and ’34 Acts for “emerging growth companies” and “crowdfunding.” In that Update, titled “Jumpstart Our Business Startups Act Makes Significant Changes to Capital Formation, Disclosure and Registration Requirements,” specific discussion of the changes that are most relevant to private fund sponsors are on pages 5, 12 and 15.
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