Last week, the Wall Street Journal published an article stating:
“The JOBS Act, signed by President Obama on April 5, lifted a decades-old restriction on how hedge funds can go after new investors, clearing the way for managers to speak more publicly about their strategies and performance and even to advertise.”
Later, a WSJ blog asserted:
“But legal experts expect that once the Securities and Exchange Commission issues revised rules under the new law, hedge funds (and private-equity funds) will be free to promote themselves in print ads, on radio and television, and online, much as mutual funds have long done. There’s no reason, in principle, why they couldn’t even start tweeting.”
The Jump Start Our Business Startups Act (JOBS Act) does require the Securities and Exchange Commission to revise its rules to provide that the prohibition against general solicitation or general advertising contained in section Rule 502(c) will not apply to offers and sales of securities made pursuant to section Rule 506, provided that all purchasers of the securities are accredited investors. The revised rules must also require issuers to take reasonable steps to verify that purchasers are accredited investors.
It would seem, therefore, that the WSJ got it right. But maybe not, hedge funds also must be concerned about whether they are subject to registration under the Investment Company Act of 1940. Hedge funds don’t register – mostly in reliance upon one or both of the exceptions from the definition of “investment company” set forth in Sections 3(c)(1) and 3(c)(7) of the ICA. Both of these exceptions (often mistakenly referred to as “exemptions”) are conditioned the fund not making or proposing to make a public offering. That would seem to be a problem for hedge funds taking advantage of the revisions to Rule 506.
In Compliance Building, Doug Cornelius points out that Section 201(b) of the JOBS Act provides that offers and sales under Rule 506 “shall not be deemed public offerings under the Federal securities laws as a result of general advertising or general solicitation.”