On August 29, 2012, the SEC proposed rules implementing the Jumpstart Our Business Startups Act’s (JOBS) eliminating the long-standing ban on general solicitation and general advertising for certain exempt securities offerings. The proposal would require (1) all purchasers of securities sold in such offerings to be accredited investors and (2) that issuers take reasonable steps to verify that their purchasers are accredited investors. The proposed amendments remain subject to modification prior to being finalized but there is indication that the SEC is considering implementing further rule changes including imposing standardized performance reporting methodologies on funds taking advantage of the new 506(c). Also unclear is whether the SEC will specifically address a variety of unresolved questions, the most salient of which, include the following:
• Will an existing fund be required to perform due diligence regarding the accredited investor status of its pre-existing investors in connection with its election to become a 506(c) issuer? In the event that the SEC requires due diligence, many private funds may discontinue their existing offerings under 506(b) and, after dormant period, commence new offerings under 506(c).
• Will the CFTC reconcile its existing prohibition on advertising by certain commodity pools with 506(c)? Given recent broadening of the definition of a commodity pool to include swaps and the removal of the qualified purchaser exemption, this is especially relevant to private funds today. Since the JOBS Act does not mention private funds in its text or the legislative history, the CFTC could conclude that commodity pool rules do not need to be addressed. While this seems unlikely, harmonization of the agencies rules may take an extended period and leave may CPOs and exempt pools in limbo.
• How will private funds verify accredited investor status? The SEC has stated that it is a facts-and-circumstances determination and standards are evolving. One of the likely modifications to the private fund’s current legal documentation is that an adviser will ask each new investor to affirm that their subscription was funded without the use of financing.
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