SEC Confirms Private Funds May Engage in General Solicitations for Regulation D Offerings

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Privately offered funds, such as hedge funds, venture capital funds and private equity funds, typically rely on Section 4(a)(2) and the Rule 506 safe harbor to offer and sell their interests without registration under the Securities Act.   In addition, privately offered funds generally rely on one of two exclusions from the definition of “investment company” under the Investment Company Act, which enables them to be excluded from the regulatory provisions of that Act. Privately offered funds are precluded from relying on either of the two exclusions set forth in Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act if they make a public offering of their securities.  

 Section 3(c)(1) excludes from the definition of “investment company” any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than 100 beneficial owners, and which is not making and does not presently propose to make a public offering of its securities. Section 3(c)(7) excludes from the definition of “investment company” any issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are “qualified purchasers,” and which is not making and does not at that time propose to make a public offering of its securities.

 The JOBS Act directs the SEC to eliminate the prohibition against general solicitation for a new subset of Rule 506 offerings, and makes no specific reference to privately offered funds. Section 201(b) of the JOBS Act also provides that “[o]ffers and sales exempt under [Rule 506, as revised pursuant to Section 201(a)] shall not be deemed public offerings under the Federal securities laws as a result of general advertising or general solicitation.”

 In the proposing release on the JOBS Act rules which eliminate the restrictions on general solicitations for certain offerings, the SEC stated that it  historically has regarded Rule 506 transactions as non-public offerings for purposes of Sections 3(c)(1) and 3(c)(7).  The SEC further stated it  believes the effect of Section 201(b) is to permit privately offered funds to make a general solicitation under amended Rule 506 without losing either of the exclusions under the Investment Company Act.

 While the SEC’s statements may seem generous to some, hedge funds, private equity funds and venture capital funds should be aware that there may be significant limitations on the content of any advertising as we explained here.

 Check frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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