The Jumpstart our Business Startups Act (JOBS Act), enacted April 5, 2012, contains important provisions that may allow private equity funds to expand their marketing efforts to attract limited partners.
Background
Most private equity funds offer their limited partnership interests to accredited investors through exempt offerings under Rule 506 of Regulation D. Regulation D currently prohibits the use of "general solicitation" in advertising the offering to prospective purchasers under Rule 506. While general solicitation is not specifically defined in the securities laws, the rules prohibit:
- Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
- Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.
Additionally, in no-action letters, the Securities and Exchange Commission (SEC) has stressed the importance of a "pre-existing relationship" with potential investors as a key indicator of determining whether a communication is a "general solicitation" or constitutes "general advertising."
As a result of the ban on general solicitation, private equity funds have been extremely limited in terms of permissible marketing efforts. Basically, fund managers have been required to rely upon their personal connections to limited partners or the personal connections of registered placement agents.
Amendments to Rule 506 - Lifting the Ban on General Solicitation The JOBS Act requires the SEC to adopt rules lifting the ban on general solicitation in Rule 506 offerings, provided that all purchasers in the offering are accredited investors. Issuers must take reasonable steps, to be defined by the SEC, to verify that the purchasers are accredited investors. The JOBS Act also provides that offerings conducted in accordance with revised Rule 506 will not be deemed a "public offering." As a result, private equity funds that utilize general solicitation in reliance on revised Rule 506 will not risk losing their registration exemptions under Sections 3(c)(1) or (7) of the Investment Company Act.
The SEC's rules on this amendment to Rule 506 were originally due by July 4, 2012. However, the SEC has delayed its rule-making, burdened by many new rule-making initiatives under both the Dodd-Frank Act and the JOBS Act. The SEC currently anticipates voting on preliminary rules by August 29, 2012. After allowing for public comment, final rules would likely then follow sometime in early 2013.
Practical Impact
Ultimately, the SEC's rulemaking will be critical to understanding the scope of this change. Until final rules are adopted, the ban on general solicitation remains and funds should proceed accordingly with regard to any capital raising efforts. While it is currently difficult to predict, we anticipate that private equity funds will have the ability to use a broader array of marketing techniques in reaching out to potential limited partners, including print, internet, broadcast or social media advertisements, utilization of investor-matching websites, and hosting investment seminars.
The impact of these changes on the fund raising techniques utilized by private equity firms remains to be seen. We expect that general solicitation techniques may help new and smaller funds raise their early rounds. However, general solicitation techniques may be utilized less frequently by more established funds, as they tend to rely on existing relationships and a certain amount of exclusivity to raise their capital.
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