High profile groups have begun to submit comments on the JOBS Act to try and steer rulemaking in the correct direction.

The Federal Regulation of Securities Committee, Business Law Section, of the American Bar Association noted:

  • The proposed rules or the accompanying release should reflect the existing definition of “accredited investor” that includes a reasonable belief standard – and nothing more onerous, such as an absolute verification.
  • In setting forth the reasonable steps to be taken to verify that purchasers of the securities offered by means of general solicitation or general advertisement in Rule 506 offerings are accredited investors, the proposed rules should reflect current custom and practice.  Here they are saying the standard subscription agreement should be enough to verify accredited investor status unless the issuer has knowledge otherwise.
  • The group correctly noted that Rule 144A only applies to resales.  However, the investment banks that are initial purchasers in the 144A transactions acquire the securities from the issuer in a Section 4(2) private placement, which is not a Rule 506 offering.  For the elimination on general solicitation to be of help in 144A issuance transactions, the SEC needs to provide by rule that the use of general solicitations in the 144A transaction does not destroy the initial placement using the 4(2) exemption.

The Managed Funds Association, an advocacy group for hedge funds, also submitted a useful comment letter:

  • Hedge funds are permitted to makes sales of securities to “knowledgeable employees” (as set forth in Rule 3(c)(5)) but still maintain their exemptions from registration under the Investment Company Act.  Accordingly, the group recommends that the SEC amend the definition of “accredited investor” to include those individuals who meet the definition of “knowledgeable employee” in Rule 3c-5 under the Investment Company Act so that hedge funds will be able to make general solicitations under the JOBS Act.
  • Section 206 and Rule 206(4)-1 of the Investment Advisers Act place restrictions on advertisements by registered investment advisers.  The group believes uncertainty remains as to the scope and application of these limitations to private fund advisers and urges the SEC to permit greater disclosure of information related to registered or exempt private fund managers in advertising materials.
  • The group notes that 3(c)(7) funds, which only sell securities to “qualified purchasers,” will now be able to have more than 499 investors as a result of changes to the Exchange Act registration thresholds implemented by the JOBS Act. Section 504 of the JOBS Act directs the Commission to review whether additional tools are needed to enforce the anti-evasion provision in Rule 12g5-1 under the Exchange Act, and provide its findings to Congress. The Managed Funds Association believes the necessary enforcement provisions are in place for hedge funds, because hedge funds that rely on Section 3(c)(7) are already subject to a similar anti-evasion provision in Rule 2a51-3 under the Investment Company Act, which deems a company formed for the specific purpose of investing in a 3(c)(7) fund to be a qualified purchaser only if each beneficial owner of the company’s securities is a qualified purchaser.

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