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.
Mitch Ackles, President of the Hedge Fund Association, praised the President for signing the JOBS Act. Ackles stated, “This is an action whose time has come. Now that many hedge fund managers are required to register with the SEC, the strongest reason for the ban on hedge fund advertising has been removed. Second, information about hedge funds is ubiquitous because of the internet, websites and the media.” The Hedge Fund Association believes that the removal of the advertising and soliciting ban will greatly benefit registered smaller hedge funds since their size makes it difficult for them to reach investors.
Critics of the JOBS Act are concerned that there will be more fraud against investors if general solicitation is allowed. The director of investor protection at the Consumer Federation of America, Barbara Roper, claims that it will be more difficult for state regulators to protect investors from the fraud that will arise from rampant marketing. She is also concerned because “accredited investors are not necessarily sophisticated investors. It will do more harm than good.”
Even with the JOBS Act, hedge fund managers still need to be mindful that they are still liable for the contents of their advertisements and the manner in which they solicit investors. The U.S. Commodity Futures Trading Commission (CFTC) or state regulators still may subject firms registered with them to other rules and regulations relating to advertising and soliciting. The Investment Advisers Act’s prohibition on fraud will still apply to hedge fund managers that are exempt advisers, and of course the antifraud provision of the Securities Act will still apply to the issuing fund. Ron Geffner, Vice President of the Hedge Fund Association, suggests that hedge fund managers and firms seek legal advice to make sure that they are complying with all state and CFTC rules and regulations.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules as well as advising hedge fund managers.