The Jumpstart Our Business Startups Act (the “JOBS Act”), which was signed into law by President Obama on April 5, 2012, ushers in significant changes to many of the federal securities laws. In addition to lowering the costs associated with small companies raising capital and going public, the JOBS Act provides that offers and sales of securities under Rule 506 of Regulation D shall be exempt from registration even if general solicitation and general advertising are used.
Specifically, Section 201 of the JOBS Act requires the SEC, within 90 days it is signed into law, to eliminate the prohibition against general solicitation and general advertising in connection with Rule 506 offerings; provided that the securities are sold solely to accredited investors. The rationale for the change is that by requiring all investors to be accredited investors who are presumably able to fend for themselves, there is less concern with respect to the manner in which those investors are solicited. As a result, private fund managers will be permitted to engage in broader marketing activities than ever before. It is important to note, however, that the elimination of the prohibition is not effective immediately, and until the SEC amends the current regulations, the prohibition on general solicitation and advertising remains in effect.
While all private funds that rely on Rule 506 of Regulation will benefit from this change, small or newly launched funds that have previously struggled with the prohibition on general solicitation and advertising will be able to reach a broader potential investor base and access markets that would otherwise be difficult to break into. The prohibition on general solicitation and advertising has long been criticized as outdated and inconsistent with the realities of the way modern business is conducted, and the elimination of this prohibition is sure to be met with significant enthusiasm
The full text of the JOBS Act is available here. For additional information on the JOBS Act or the impact of the elimination of the general advertising/solicitation prohibition, contact us at (619) 278-0020 to schedule a consultation.