The Jumpstart Our Business Startups Act (JOBS Act) directed the SEC to amend Rule 506 of the Securities Act of 1933 thereby allowing advertising of offerings. With the lifting of the 80-year-old ban on general solicitation, various private issuers including hedge funds, private equity funds and start-up companies are free to advertise. But restrictions still apply, and not all companies are rushing to Madison Avenue.
Mostly Website Promotion
A $4.3 billion dollar Midwest hedge fund has placed a full page ad in a trade publication featuring snowboarders atop a mountain celebrating a victory with the tag line below reading Performing in All Conditions. Another hedge fund has posted a three-minute clip on its website featuring a surfer fine-tuning a surf board while the fund founders compare catching the energy of the wave with their own management style. So far, most solicitation consists of beefing up company website content as opposed to utilizing other advertising media.
Private issuers may publicly discuss investment opportunities and also publicize past performance which previously had been prohibited. However, such issuers may still only sell such securities to accredited investors, meaning an individual whose net worth is in excess of $1 million and/or an annual income in excess of $200,000. For charitable organizations or family trusts, the asset threshold is $5 million.
Burden of Proof on the Issuer
Under the former policy, the investor would simply check off a box verifying that he or she was an accredited investor. However, under the new rules, the issuer is required to take reasonable steps to verify investor accreditation, which may include review of tax returns or bank account statements.
SEC Form D Applies
Issuers engaging in general solicitation are required to file Form D with the SEC at least 15 days prior to the beginning of general solicitation and also to file an amended Form D within 30 days after the offering is terminated. Failure to abide by the Form D filing requirements could result in an SEC-imposed ban on securities issuance for a year or more.
The Pros and Cons
Advocates of general solicitation point out that disclosing past performance publicly will enhance issuer accountability as well as assist in creating a better educated investor. Opponents fear that advertising to the general public might lead to victimization of the more vulnerable, financially unsophisticated investor who could be swayed by a slick advertising campaign.
Branding, Not Advertising
Hedge fund solicitation once the purview of golf club tips and private parlor meetings will likely take advantage of this game-changing rule due to greatly increased competition. GreenPoint Legal can assist your organization in navigating these new regulatory waters.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI