JOBS Act Generates Jitters

Terry Flanagan

Some hedge funds are gearing up for new regulations that have the potential of redefining the manner in which they raise capital and market themselves to investors.

The Jumpstart Our Business Startups Act (JOBS Act), which President Obama signed into law on April 5, 2012, will ease restrictions on private offerings conducted under various exemptions provided under securities law, and allow firms to avoid the registration and disclosure obligations under the Securities Exchange act.

“Internally, we’ve viewed the JOBS Act as something of potentially huge importance, especially for firms with smaller assets under management,” said Pratik Sharma, managing director at Atyant Capital. “That said, we’ve been reading lots of conflicting things about the legislation and it is too soon in our mind to move aggressively in one direction.”

Although subject to final rulemaking by the SEC, the changes contemplated by the JOBS Act are likely to have a significant impact on the manner in which private funds attract investment capital.

In addition to eliminating the ban on general solicitation, the JOBS Act provides an exemption from broker-dealer registration for platforms that permit participants advertise, solicit, negotiate, and enter into transactions in Registration D offerings.

However, such so-called crowd funding platforms may neither receive nor have possession of customer funds or securities in connection with transactions over the platforms.

“Such exchange platforms also could facilitate capital-raising efforts, as well as provide an alternative means of liquidity for investors in private funds,” said Richard Heller, partner in the corporate transactions and securities practice at Thompson Hine.

Private funds, in conducting solicitations, rely on certain exemptions provided under the ’40 Investment Act and the ’33 Securities Act.

But in relying on these exemptions, funds are currently limited in the manner in which their securities may be offered.

In particular, they are prohibited from conducting offering though means of a general solicitation.

“Thus, private funds have been prohibited from advertising or contacting potential investors other than those with whom either the manager of the fund or any third-party placement agent has a preexisting relationship,” said Heller.

In theory, the removal of the general solicitation restrictions will permit funds to approach a wider audience when seeking investors using a variety of media, including print and electronic communications, which previously had not been possible.

“We do think this would be a new and effective medium to interact with prospects,” said Sharma. “In high value, high ticket sales, the personal touch is very much required. That said, while people aren’t likely to use their PayPal accounts to make investments in alternatives, the ability to interact with a larger group of prospects is enhanced.”

It’s not clear how the JOBS Act will actually impact the nature of communications between funds and investors.

“Currently, we do offer general opinions without discussing specific positions or investments,” Sharma said. “Even if legislative changes occurred, it is unlikely we would discuss details on specific investments.”

The JOBS Act increases the holder of record threshold, at or above which an issuer is required to register such securities, from 500 persons to 2,000 persons, and increases the total assets threshold from $1 million to $10 million.

However, the SEC has previously exempted the equity securities of issuers having less than $10 million in total AUM from registration.

“Thus, as a piratical matter, the asset threshold remains unchanged,” said Heller of Thompson Hine.

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