{"id":1855,"date":"2017-07-25T21:04:00","date_gmt":"2017-07-26T03:04:00","guid":{"rendered":"http:\/\/rwolaw.shomptonlabs.com\/?p=1855"},"modified":"2020-02-24T15:31:31","modified_gmt":"2020-02-24T22:31:31","slug":"client-alert-jobs-act-offers-new-capital-raising-alternatives-for-hedge-funds-and-startups-part-ii","status":"publish","type":"post","link":"https:\/\/rwolaw.com\/client-alert-jobs-act-offers-new-capital-raising-alternatives-for-hedge-funds-and-startups-part-ii\/","title":{"rendered":"Client Alert: JOBS Act Offers New Capital Raising Alternatives for Hedge Funds and Startups \u2013 Part II"},"content":{"rendered":"

SECURITIES AND CORPORATE FINANCE ALERT<\/strong><\/p>\n

JOBS ACT OFFERS NEW CAPITAL RAISING ALTERNATIVES FOR HEDGE FUNDS AND\u00a0STARTUPS\u2014PART II<\/strong><\/h1>\n

\u201cGENERAL SOLICITATION OR GENERAL ADVERTISING\u201d TO BE PERMITTED IN RULE 506 OFFERINGS<\/strong><\/p>\n

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the \u201cJOBS Act\u201d), a product of rare bipartisan Congressional action and White House support.\u00a0 The JOBS Act contains several provisions intended to make it easier for hedge funds and start-up and emerging companies to access capital markets by, among other things, (i) amending existing federal securities statutes and requiring corresponding changes to SEC regulations; and (ii) preempting certain state laws that otherwise might interfere the JOBS Act\u2019s objectives.\u00a0 This Securities and Corporate Finance Alert summarizes just one of the significant provisions of the JOBS Act, namely, the provision that will enable hedge funds and startup companies to raise capital under SEC Rule 506 by means of \u201cgeneral solicitation or general advertising\u201d in the offers and sales of their securities, as long as the purchasers are \u201caccredited investors.\u201d\u00a0 A previous Robinson Waters & O\u2019Dorisio Securities and Corporate Finance Alert discussed a separate JOBS Act provision\u2014one that will permit \u201ccrowdfunding\u201d as a means of raising capital.\u00a0 That Alert can be found\u00a0here<\/a>.<\/p>\n

General Background\u2014Exemption for Private Offerings Under Rule 506<\/strong><\/p>\n

The federal Securities Act of 1933 and similar state securities laws generally prohibit offers and sales of securities without the registration of those securities, unless the laws provide for an exemption from those registration requirements.\u00a0 Rule 506, adopted by the SEC in 1982 as a part of Regulation D, permits companies to raise capital by selling their securities without the delay and expense of registering those securities with the SEC, as long as the requirements of Regulation D (and other applicable securities laws and rules) are met.\u00a0 Under Rule 506, a hedge fund or other company may issue and sell an unlimited dollar value of its securities to an unlimited number of \u201caccredited investors\u201d and to no more than 35 non-accredited investors (or the issuer must \u201creasonably believe\u201d that there are no more than 35 non-accredited investors) in a single offering.\u00a0 The term \u201caccredited investor\u201d includes a long list of certain business entities and institutions, as well as well-heeled individuals.\u00a0 Non-accredited investors must also, either alone or with the aid of an independent representative, meet certain (unspecified) sophistication requirements.<\/p>\n

Among the many conditions that must be satisfied in order to comply with Regulation D is that \u201cneither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising . . .\u00a0 .\u201d\u00a0 The phrase \u201cgeneral solicitation or general advertising\u201d is not defined in SEC rules, but it is generally interpreted to mean that the issuer or person acting on its behalf (for example, a broker selling the securities) must have a preexisting substantive business or personal relationship with the persons to whom the securities are offered.\u00a0 Thus, \u201ccold calling,\u201d newspaper, radio, television, or Internet advertising, or holding meetings or seminars whose attendees have been invited by any general solicitation or general advertising, are prohibited under Regulation D.\u00a0 State securities laws and rules contain similar prohibitions against general solicitation and general advertising.<\/p>\n

JOBS Act Change to Rule 506<\/strong><\/p>\n

Title II of the JOBS Act, captioned \u201cAccess to Capital for Job Creators,\u201d mandates that the SEC adopt changes to Rule 506 that will eliminate the ban on general solicitation and general advertising, as long as all of the purchasers in a securities offering are accredited investors.\u00a0 The statute also mandates that the SEC adopt rules to require that the issuer \u201ctake reasonable steps to verify\u201d that all purchasers are accredited.<\/p>\n

This JOBS Act change will no doubt make it easier for hedge funds and other issuers to raise capital, as it will open new pathways to potential investors.\u00a0 The statute also, however, leaves a number of questions open for interpretation (and SEC rulemaking).\u00a0 For example, will the current Rule 506 provision permitting sales of securities to up to 35 non-accredited investors (without general solicitation or general advertising) survive, or will the \u201cnew\u201d Rule 506 take its place and require that all sales be made to accredited investors only?\u00a0 In addition, the statute literally mandates that \u201cnew\u201d Rule 506 require that the purchasers, in fact, be accredited in order to satisfy the requirements of the new rule.\u00a0 Will the \u201cnew\u201d Rule 506 permit offers and sales to whom the issuer \u201creasonably believes\u201d are accredited, as is currently permitted, even if the issuer turns out, in hindsight, to be in error?\u00a0 Will any form of advertising or solicitation be permitted (for example, Internet, radio, television, newspapers, seminars, billboards), or will some forms of advertising or solicitation (for example, cold calling) still be prohibited?\u00a0 Will hedge funds and other issuers be able to solicit directly, or will the solicitation be required to be conducted through an intermediary, such as a broker?\u00a0 Finally, what, if any, specific \u201creasonable steps\u201d will hedge funds and other issuers be required to take to verify that all purchasers are accredited?\u00a0 The JOBS Act requires that the Rule 506 changes be adopted by the SEC within 90 days of the enactment of the law (i.e., by July 5, 2012).<\/p>\n

Preemption of State Law<\/strong><\/p>\n

Securities issued in a Rule 506 transaction are designated as \u201ccovered securities\u201d in the federal Securities Act, meaning that state laws, rules, regulations, orders, etc. relating to registration or qualification of securities and securities offerings do not apply to securities issued under Rule 506.\u00a0 States may still enforce their antifraud laws and regulations against issuers and brokers, and they may still require that the issuer notify them of Rule 506 transactions in their states.<\/p>\n

What Startups and Hedge Funds Can do Now<\/strong><\/p>\n

As noted above, the final Rule 506 amendments are not required to be adopted until early July, 2012.\u00a0 There are, however, other exemptions from registration that have been utilized, and that can continue to be utilized, by hedge funds and startup (and other) companies to raise capital.\u00a0 Businesses wishing to raise capital now may wish explore one or more of these alternative exemptions for their capital needs.\u00a0 Our finance group can work with your company to explore the various alternatives for funding its operations and growth.<\/p>\n

The information contained in this Article is for information purposes only and does not constitute legal advice for any specific situation. For more information about the subject matter of this Article, please feel free to contact\u00a0Jeffrey A. Bartholomew<\/a>\u00a0at\u00a0Robinson Waters & O\u2019Dorisio<\/a>\u00a0at 303.297.2600.\u00a0 The invitation to contact us is not intended as a solicitation in any jurisdiction in which we are not licensed to practice law.<\/p>\n","protected":false},"excerpt":{"rendered":"

SECURITIES AND CORPORATE FINANCE ALERT JOBS ACT OFFERS NEW CAPITAL RAISING ALTERNATIVES FOR HEDGE FUNDS AND\u00a0STARTUPS\u2014PART II \u201cGENERAL SOLICITATION OR GENERAL ADVERTISING\u201d TO BE PERMITTED IN RULE 506 OFFERINGS On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the \u201cJOBS Act\u201d), a product of rare bipartisan Congressional action and […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[83],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/posts\/1855"}],"collection":[{"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/comments?post=1855"}],"version-history":[{"count":1,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/posts\/1855\/revisions"}],"predecessor-version":[{"id":1856,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/posts\/1855\/revisions\/1856"}],"wp:attachment":[{"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/media?parent=1855"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/categories?post=1855"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/tags?post=1855"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}