Commentary: Reg 506 and Advertising
Commentary by David Drake, The Solo Loft.
Funds should prepare to advertise for capital to the general public. In what may be an unforeseen consequence of the Jumpstart Our Business Startups Act (JOBS Act), funds will be able to advertise to the public as early as July 4, 2012. This comes as changes to Regulation 506 kick in, 90 days after President Obama signed the JOBS Act into law on April 5, 2012.
Part of the JOBS Act changes the general non-solicitation ban that has been in place under the 1933 SEC Act. Removing this ban allows public advertising for firms applying under Regulation 506 with one stipulation – they may advertise to the general public, but can still only accept capital from accredited investors.
How does this effect funds?
Since a previous ruling by the SEC under the Investment Company Act of 1940 (rule 3(c)1 and 3(c)7) identifies those private offerings as Regulation 506 offerings, the same relaxing of the rules will apply to funds as well. Secondly, the JOBS Act provides that offerings under 506 will not be a public offering for purposes of “other federal securities laws.” The 1940 Act would fall under that exemption, essentially making the Regulation 506 changes apply to funds as well.
What will happen?
The SEC will need to address this issue. They may stall and ask for an extension. Alternatively, they could rescind the original ruling that bound the 1940 private offerings under Regulation 506. They could argue that the intent of the JOBS Act was not to affect private offerings. But this is dangerous ground, and it risks lawsuits if the SEC is seen as making what amounts to an unconstitutional change to legislation duly enacted into law.
Meanwhile, funds should prepare to advertise for capital to the general public. This is the biggest change yet to the SEC Acts of 1933, 1934 and 1940. Removing the non-solicitation ban introduces a powerful new force into the marketplace.
David Drake is a founding board member of the Crowdfund Intermediary Regulatory Advocates, or CFIRA. CFIRA was established following the signing of the Jumpstart Our Business Startups (JOBS) Act. CFIRA is an organization formed by the crowdfunding industry’s leading platforms and experts. The group will work with the Securities & Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and other affected governmental and quasi-governmental entities to help establish industry standards and best practices. For more information, visit www.CFIRA.org.