On July 10, the SEC adopted rules to implement Section 201(a) of the JOBS Act. Under amended Rule 506, companies will have the choice of using Rule 506(b) to conduct a private placement subject to the current prohibition against general solicitation and general advertising or using new Rule 506(c), pursuant to which securities can be offered through general solicitation and general advertising. In the adopting release, the SEC confirmed that private funds are permitted to engage in general solicitation in compliance with new Rule 506(c) without losing either of their Section 3(c)(1) or 3(c)(7) exclusions under the Investment Company Act of 1940.
Private funds generally utilize Section 4(a)(2) and Rule 506 to offer securities in their funds to investors without registration and primarily rely on one of the following two exclusions to avoid being defined as an “investment company” under the Investment Company: Section 3(c)(1) or Section 3(c)(7). Section 3(c)(1) of the Investment Company Act excludes from being an investment company any issuer whose outstanding securities are beneficially owned by not more than 100 persons and which is not making and does not presently propose to make a public offering of its securities. Section 3(c)(7) exempts issuers whose securities are owned solely by qualified purchasers and which are not making and do not presently propose to make a public offering of its securities. Accordingly, prior to the adoption of the final rules on June 10, some commentators argued that private funds would not be able to engage in general solicitation under proposed Rule 506(c) without losing their ability to rely on the Section 3(c)(1) or Section 3(c)(7) exclusions.
In rejecting this position, the SEC explained that Section 201(b) of the JOBS Act provides that “offers and sales exempt under [the new Rule 506(c)] shall not be deemed public offerings under the federal securities laws as a result of general advertising or general solicitation. As the Investment Company Act is a federal securities law, the effect of Section 201(b) is to permit offers and sales of securities under Rule 506(c) by private funds relying on the exclusions from the definition of ‘investment company’ under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.”