Whether the recently signed JOBS Act will have any impact on actual jobs is still up for debate, but one thing seems clear: the hedge fund industry will never be the same.
The so-called JOBS Act, which stands for "Jumpstart Our Business Start-ups," will, among other things, change the way private placements are conducted and will allow general solicitation and general advertising, according to Kinetic Partners, a global professional services firm to the asset management, investment banking and brokerage community.
Specifically, the JOBS Act amends the text of Rule 506 on private placements and forces the SEC to lift the ban on general solicitation and advertising on hedge funds. The SEC has 90 days to act on this amendment and until it does, the current rules remain in effect.
Although the SEC has been directed to lift the ban on advertising, it does have the authority to impose limitations to the manner in which private placements are conducted. General solicitation and advertising are allowed only if all the investors are accredited and funds will no longer be able to have up to 35 unaccredited investors. However, a fund may be able to still have 35 unaccredited investors if it does not engage in general solicitation or advertising.
Under the current rules, a fund manager needs to have a "reasonable belief" that its investors are accredited and such reasonable belief is established by customary representations given by investors in questionnaires and subscription documents. The JOBS Act also states that the sale of securities under the new rules shall not be deemed as public offerings under the federal securities laws as a result of general advertising or general solicitation.
The wording of the final rules will provide further clarification, but based on the current amendment, advisers to private funds will likely be permitted to:
- Use Web sites and social media to advertise
- Solicit investors in investor meetings
- Talk to the press
- Reach out to the public (and no longer need to establish a "pre-existing relationship" with investors)
- Revise provisions in private placement memoranda ("PPMs") to no longer mandate confidentiality requirements
- Distribute their PPMs and no longer need to number the PPMs and keep track of recipients.
“It will be interesting to see how the SEC responds to the new rules that have been proposed and whether or not it will become easier for hedge funds to actually be marketed,” said Jonathan Saxton, Member at Kinetic Partners. “Since the SEC has 90 days to propose a counter to the current layout of the JOBS Act, I have my doubts that it will remain entirely the same as we currently see it.”