On March 27, 2012, the House of Representatives passed the “Jumpstart Our Business Startups Act” (the “JOBS Act”) that is intended to make it easier for smaller companies to raise capital in the United States public and private capital markets. Last week, the Senate approved the same version of the JOBS Act and it is expected to be signed into law by President Obama.

The JOBS Act (i) directs the SEC to remove the general solicitation and advertising prohibitions that currently apply to offerings made pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and (ii) raises the number of equity holders in Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) that triggers public company reporting. These provisions of the JOBS Act will benefit private investment funds

Removal of Prohibition on General Solicitation and Advertising

The JOBS Act directs the Securities and Exchange Commission (the “SEC”), within 90 days of its enactment, to revise its rules to remove the prohibitions against general solicitation and general advertising in connection with offers and sales of securities made pursuant to:

• Rule 506 of Regulation D under the Securities Act, provided that the issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors, using such methods as determined by the SEC, or
• Rule 144A of the Securities Act, provided that the securities are sold only to persons that the issuer reasonably believes is a qualified institutional buyer.

The JOBS Act also provides that transactions under and offerings relying on Rule 506 “shall not be deemed public offerings under the Federal securities laws as a result of general advertising or general solicitation.” Therefore, a private offering that complies with the amended Rule 506 would not constitute a public offering for purposes of Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940.

Modification of 12(g) Holders of Record Threshold

The JOBS Act also increases the “holders of record” threshold of Section 12(g) of the Exchange Act from 500 persons to either (a) 2,000 persons or (b) 500 persons who are not accredited investors. Therefore, since private funds relying on the exception from investment company status set forth in Section 3(c)(7) of the Investment Company Act of 1940 are restricted by such threshold, the JOBS Act would increase the “499 investor” limit for such private funds.

We will be monitoring the SEC rulemaking in connection with the JOBS Act and will provide further information on these matters as the SEC rulemaking proceeds.

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If you have any questions, please contact an attorney in the Investment Management Group at Seward & Kissel LLP.