On April 5, 2012 President Obama signed the Jumpstart Our Business Startups (JOBS) Act. Among its proposed sweeping changes, it included IPO legislation for emerging growth companies (EGCs), companies with less than $1 billion in assets, to facilitate the IPO process, ease reporting requirements, make confidential SEC filings and add a "test the waters" mechanism. It lessened disclosure obligations relating to financial statements and executive compensation.
The act also introduced the concept of crowd funding, whereby private companies use electronic portals to access small investors who pool their money to fund these entities, subject to the adoption of SEC rules that have yet to be written.
There are other regulatory events in addition to the JOBS Act and Dodd-Frank that will impact private funds.
The Commodity Futures Trading Commission (CFTC) repealed a key exemption earlier this year upon which many hedge funds had relied. Set to expire at the end of the year, absent a de minimus exemption, private funds must now prepare to register with the CFTC (in addition to the Dodd-Frank requirement that they register as registered investment advisers (RIAs) with the SEC or the various states pursuant to Dodd-Frank).
Speaking to that issue, the SEC’s Drew Bowden reported that approximately 1,400 new hedge funds registered as RIAs with the SEC as a result of Dodd-Frank, and on September 5, he announced that the SEC would initiate audits in January to promote compliance, prevent fraud and identify risk. Bowden stated that the SEC will begin onsite risk-based presence exams to look at what the SEC considers "high risk funds" and to examine a fund’s marketing materials, separate accounts, conflict procedures and valuation – to name just a few items.
Thompson Hine has launched a program to assist funds in preparing for an SEC audit.
Returning to the JOBS Act, on August 29 the SEC released an interim rule regarding the general solicitation provision of the act. The act mandates that issuers can generally solicit pursuant to Regulation D as long as they ultimately sell securities to accredited investors. The SEC’s release left vetting a sale to an accredited investor to each issuer. It stated that the issuer would need to take reasonable steps to determine if an investor is accredited but did not provide a safe harbor for issuers to rely upon. Instead, the interim rule called for another comment period, which expired October 5.
The SEC stated that issuers using general solicitation should take reasonable steps to verify that purchasers of securities are accredited investors. Whether the steps are reasonable would be an objective standard left to each issuer. The SEC further stated that issuers should consider a number of factors to verify that an investor is accredited. Some examples of the factors one might consider to determine accreditation might include:
- The nature of the purchaser and type of accreditation an investor claims.
- The amount and type of information the issuer has about the purchaser.
- The nature of the manager: An offering conducted through a publicly available website or through social media would most likely require greater verification measures than would be required in an offering made to investors in a pre-screened database.
- The terms of the offering and size of the investment. The SEC stated that a purchaser’s ability to meet a high minimum investment amount could be relevant to the issuer’s evaluation of the types of steps necessary to verify the purchaser’s status as an accredited investor.
At present, it is expected that final rules will be promulgated by the SEC in the first quarter of 2013.