President Obama's Jumpstart Our Business Startups (JOBS) Act will change the hedge fund industry by allowing advisors to private funds to advertise their services.
According to Kinetic Partners, a global professional services firm to asset management, investment banking and brokerage companies, the JOBS Act amends the text of Rule 506 on private placements and forces the U.S. Securities & Exchange Commission to lift the ban on general solicitation and advertising on hedge funds.
Although the SEC has been told to lift the ban, it can impose limitations on how the private placements are conducted. General solicitation and advertising are allowed only if all the investors are accredited and funds will no longer be able to have up to 35 unaccredited investors. However, a fund may be able to still have 35 unaccredited investors if it does not engage in general solicitation or advertising.
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Under the current rules, a fund manager needs to have a "reasonable belief" that its investors are accredited and such reasonable belief is established by customary representations given by investors in questionnaires and subscription documents. The JOBS Act also states that the sale of securities under the new rules shall not be deemed as public offerings under the federal securities laws as a result of general advertising or general solicitation.
Advisors to private funds likely will be allowed to use websites and social media to advertise, solicit investors in investor meetings, talk to the press, reach out to the public (and no longer need to establish a pre-existing relationship with investors), revise provisions in private placement memoranda to no longer mandate confidentiality requirements and distribute their PPMs and no longer need to number the PPMs and keep track of recipients.
"It will be interesting to see how the SEC responds to the new rules that have been proposed and whether or not it will become easier for hedge funds to actually be marketed," said Jonathan Saxton, member at Kinetic Partners. "Since the SEC has 90 days to propose a counter to the current layout of the JOBS Act, I have my doubts that it will remain entirely the same as we currently see it."
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