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One of the most significant provisions of the Jumpstart Our Business Startups (JOBS) Act is its elimination of the general solicitation ban currently contained in Rule 502 for Rule 506 offerings sold only to “accredited investors.” As a result, hedge funds will be able to advertise to investors through the internet, mass mailings, and other media. Previously hedge funds have been banned from soliciting or advertising their private offerings to the general public. This prohibition has created confusion among hedge fund managers because of uncertainty about the meaning of “general solicitation.”

The JOBS Act requires the Securities and Exchange Commission (SEC) to eliminate the ban on general solicitation and advertising as long as all purchasers are either “accredited investors” or “qualified institutional investors.” An “accredited investor” includes an individual whose net worth is at least $1 million, excluding the value of his/her primary residence or who meets certain income criteria. We have previously discussed the definition of “accredited investor” in Financial Advisers Should Note More Restrictive Accredited Investor Definition. A “qualified institutional investor” includes companies that manage a minimum at $100 million in assets. Under the JOBS Act, the SEC must adopt rules to eliminate the ban on advertising for an offering by a private issuer within 90 days.
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With the passage of the Jumpstart Our Business Startups Act (JOBS Act), the Securities and Exchange Commission (SEC) will be required to create a number of new rules, in addition to the rules already required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The first deadline that the SEC faces under the JOBS Act is adopting rules eliminating the ban on general solicitation of certain private offerings. It will have 90 days to revise Rule 506 of Regulation D to allow those securities to be sold using general solicitation or advertising when all of the purchasers of the securities are “accredited investors.”

The JOBS Act also created a new crowdfunding exemption to registration. The SEC will have 270 days to adopt the rules and regulations effectuating this exemption, as the SEC determines to be necessary or appropriate for the protection of investors. The Financial Industry Regulatory Authority may also adopt rules regulating “funding portals” for issuers.
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The Colorado Securities Division recently declined to issue a no-action letter in connection with a company that intends to educate and train people in stock market trading. Mark Espy, owner of MarkEspyMentorin.com, sent a letter to the Colorado Division of Securities on January 17, 2012 asking for either a no-action letter or the Staff’s clarification that he and his company do not need to be licensed as an investment adviser in Colorado. Espy plans to tutor people on how to use various tools in order to trade in the stock market. The course will be taught through webinars, and students will pay a fee to enroll.

According to Espy, the instruction provided in the course will include curriculum designed to teach various techniques and procedures to measure an equity’s viability for trading or investing, portfolio management, the importance of diversification, explanations of indicators, trading strategies, and building a trading plan, among other topics. Espy has also been approved to teach an adult education class on the stock market at a local community college.
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Like numerous other states, Rhode Island has issued a proposed private fund exemption. We have previously discussed various other states that have created the same type of rule in Multiple States Create Private Fund Adviser Exemption, Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers, and California Extends Public Comment Date on Its Proposed Private Fund Exemption Rule.

Under the proposed rule, in order for a private fund adviser to be exempt from registration, the private fund adviser has to satisfy a number of conditions: (1) neither the advisers nor their advisory affiliates are subject to “bad boy” disqualification provisions under Rule 262 of SEC Regulation A, (2) pursuant to SEC Rule 204-4, the private fund adviser files with the state each report and amendment that an exempt reporting adviser is required to file with the Securities and Exchange Commission, and (3) the private fund adviser pays a $300 fee.
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The President signed the Jumpstart Our Business Startups Act (JOBS Act) on April 5 during a Rose Garden signing ceremony. He called the bill a “game changer” that would remove barriers that prevent small businesses from growing and hiring. He stated that this bill was so important that he “called on Congress to remove a number of barriers that were preventing aspiring entrepreneurs from getting funding.” We have previously discussed the JOBS Act in JOBS Act Passes Both Chambers and Will be Sent to President and House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act.

The purpose of the JOBS Act is to provide mechanisms for small businesses to raise capital more easily and efficiently, which proponents say would promote the creation of more jobs. The President stated “because of this bill, start-ups and small business will now have access to a big pool of potential investors – namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”
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The House passed the Jumpstart Our Business Act (JOBS Act) again this week with a 380 to 41 vote after the Senate sent it back with amendments. Last week, the Senate passed the JOBS Act with a 73 to 26 vote. The House of Representatives originally passed the bill with an overwhelming majority on March 9, which we discussed in House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act.

The JOBS Act received significant bipartisan support. House Majority Leader Eric Cantor (R-Va.) stated that the bill was “an increasingly rare legislative victory in Washington where both sides seized the opportunity to work together, improved the bill and passed it with strong support.” President Obama has shown strong support for the bill, and he has said he will sign it as soon as it is sent to him.
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Three more states have taken action either to adopt a private fund exemption or to create an interim exemption until final rules are proposed. As previously discussed in California Extends Public Comment Date on Its Proposed Private Fund Exemption Rule and Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers, California and Virginia have already started the process of creating a private fund adviser exemption. The states which have adopted exemption provisions most recently are Maine, Massachusetts and Wisconsin.

Maine issued an interim order exempting private fund advisers from registration, which became effective on February 16, 2012. It will remain effective until a private fund adviser rule is proposed. According to the exemption, in order to be exempt:

  • The investment adviser must advise one or more “qualified private funds” which are defined in SEC Rule 203(m)-1;
  • The adviser must maintain a place of business in Maine;
  • The adviser cannot hold himself/herself out to the public as an investment adviser;
  • Neither the adviser nor their advisory affiliates may be subject to “bad boy” disqualification provisions which are defined in Rule 262 of SEC Regulation A; and
  • Under Rule 204-4 of the Investment Advisers Act of 1940, the adviser must file with the Maine Office of Securities the SEC-filed reports and amendments required for exempt reporting advisers.

If a private fund adviser advises at least one 3(c)(1) fund, defined in the Investment Company Act of 1940, that is not a venture capital fund, the fund must satisfy the same additional requirements of the Virginia Proposed Rule that we have previously discussed. (A 3(c)(1) fund is a fund with less than 100 beneficial owners and which does not presently propose to make a public offering of its securities.)
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The Commodity Futures Trading Commission (CFTC) showed this week that it may be increasing scrutiny of firms in connection with customer funds. This may be a result of the MF Global collapse last fall, in which the firm had misplaced more than $1 billion in customer funds. Since then, the CFTC has adopted stricter rules designed to better ensure the segregation of client funds from firm money.

On March 13, the CFTC brought numerous enforcement actions against firms to show that it plans to monitor firms’ treatment of customer funds more closely. These actions come during the same week in which the Futures Industry Association conference in Boca Raton was held. A former chief trial attorney for the CFTC, Allison Lurton, stated it has used trade conferences in the past as a means to drive home a point, so it may be no coincidence that the CFTC waited until the week of the conference to bring disciplinary actions. She stated, “They want to make sure that they’re sending the message to the market that they’re still on the beat and serious about protecting customer funds.”
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The Investment Advisers Association (IAA) believes that it needs to become more outspoken and involved in order to deter Congress from passing legislation requiring a self-regulatory organization (SRO) be designated for registered investment advisers. The IAA is concerned because Congress is fully aware of the Financial Industry Regulatory Authority’s (FINRA) position and its desire to become the SRO for investment advisers. IAA vice president for government relations Neil Simon stated, “Despite our best efforts, there is still a woeful ignorance of the role investment advisers play. They’re aware of FINRA. We need to help educate policymakers so they make informed decisions.”

Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the Securities and Exchange Commission (SEC) prepare a report considering whether there should be an SRO for investment advisers, as there is for broker-dealers. The SEC set forth three possible models to help the agency better oversee advisers: (1) allow the SEC to charge user fees for exams, (2) establish a new SRO, or (3) allow FINRA to be the SRO for both registered investment advisers and broker-dealers. The IAA is supporting the user fee approach, while FINRA is aggressively pursuing becoming the designated SRO. House Financial Services Committee Chairman Spencer Bachus (R-Ala) previously offered a bill which would provide for an SRO in response to the SEC’s recommendations, which were delivered to Congress in January 2011. Some industry observers believe that Rep. Bachus is likely to release a revised discussion draft of his bill and push it, because he will leave his post of Financial Services Chairman in January 2013 due to term limits.
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The Securities and Exchange Commission (SEC) has decided to increase regulation of the private equity industry, which has previously faced less regulatory scrutiny than other industries such as banking and hedge funds. At the end of 2012, the SEC sent several letters to private equity funds as “informal inquiries.” It is unclear which firms actually received the letters. The SEC maintains that its actions are not a result of suspecting any particular wrongdoing by specific firms, and it claims that its goal is to investigate possible violations of securities laws.

In the letter, the SEC requested information from private equity firms in relation to 12 broad areas including:

  • Financial statements;
  • Support for valuations of fund assets;
  • Documents setting forth a value of any assets owned by a fund over the past three years; and
  • Information on agreements between the firms and those that value fund assets.

The SEC is placing greater emphasis on the valuation of private equity firms since the firms are not publically traded and there is no listing price on the stock market. As a result, there is no easily ascertainable price for private companies. This allows for subjective judgments to play a large role in valuation. Private equity managers use varying, complex methodologies to value their holdings, which are often private companies bought using debt.
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