Under Section 201(a)(1) of the Jumpstart Our Business Startups Act (the JOBS Act) adopted by Congress on April 5, 2012, the Securities and Exchange Commission (SEC) was directed to revise Rule 5061 under Regulation D2 within 90 days after enactment of the JOBS Act to remove the prohibition under Rule 502(c) against general solicitation and general advertising in connection with offers and sales of securities made pursuant to Rule 506. On August 29, 2012, the SEC proposed amendments to its rules to implement that mandate. Under the mandated changes to Rule 506, when an issuer conducts an offering using general solicitation and general advertising, all purchasers of the securities of the issuer in that offering will be required to be “accredited investors,” and the issuer of the securities must take reasonable steps to verify that all purchasers of the securities are accredited investors.

This DechertOnPoint discusses some of the implications of the mandated changes to Rule 506 for hedge funds4 that do not register as “investment companies” by virtue of the exclusions from the definition of “investment company” contained in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940, as amended (the 1940 Act), and that do not sell their shares in public offerings registered under the Securities Act of 1933, as amended (the 1933 Act).