A Storm is Coming: PE Funds Fall Under Reg D 506 C

In spite of prior delays, on August 29, 2012, the Securities and Exchange Commission finally issued its first proposals for rules under the Jobs Act that would relax general solicitation for accredited investors.

Signed into law on April 5, the Jumpstart Our Business Start-ups (JOBS) Act makes revolutionary changes to federal security laws that are over 70 years old. The changes include allowing issuers to advertise certain securities to accredited investors more freely, prepare IPOs to go public with discrete filing as well as relaxing the Sarbannes-Oxley Act compliance cost for five years for firms with less than $1 billion in revenue.

On August 29, the SEC proposed rules in which stock offerings may be marketed to the general public through any advertising mechanism without restriction—the biggest restriction is reserved for the public, and not for the seller, however. The rule limits purchasers of those stocks to investors with more than $1 million in assets, excluding their primary residence, or those earning more than $200,000 a year. It also requires the issuer of the stock to take reasonable steps to verify whether someone is actually accredited. Previously, issuers could advertise their Regulation D, Section 506 offerings to the general public.

Funds should prepare to advertise for capital to the general public, since, in what may be an unforeseen consequence of the Jobs Act, funds will be able to advertise to the public as early as December 2012. This comes as changes to Regulation 506(C) kicks in.

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 impact 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?

As noted above, funds should prepare to advertise for capital to the general public and retail customers. 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.

Essentially, the current Regulation D, 506 will be renamed 506 b and will allow 35 non-accredited investors and unlimited accredited investors without removing the non-solicitation ban. The new law will be called 506 c and while it will only allow accredited investors general solicitation will be permitted.

What will happen in 2013?

Regulation D 506 c will be implemented and while we will see a surge of ambulance chasing fund managers seeking retail investors’ capital, we see this as a tool for smaller broker dealers to reinvigorate their capital investor base. A potential explosion of foreign companies and funds will also seek financial media outlets in the US as this law will be confirming the geopolitical landscape in the US. private equity – brace yourself. A storm is brewing – private equity will see its branding change in 2013 as small and desperate emerging fund managers will pay media in search for retail investors.

David Drake is founder of LDJ Capital and The Soho Loft and a fervent Jobs Act Advocate. Opinions expressed here are entirely his own.

Image Credit: Shutterstock.com


  • Do you expect to see the solicitation decision out of the SEC this week?

  • Mary Schapiro resigns Dec 14 as of this morning according to the WSJ and minutes ago the White House announced that SEC Commissioner Elisse Walters will replace Mary. Walters has been with the SEC since 1977. Meanwhile, colleagues met with her and all the commissioners last week in DC. I do not expect 506c to pass as is. I believe a new proposal will be submitted before voting occurs as the lack of safe guards is a huge detriment for the industry. Without safe harbors we will see law firms recommending issuers to collect tax returns from investors – something that just won’t happen. Just wrote an article on this and it should be published within days. Of course, a new SEC Commissioner has to be put in place.

  • On Oct 15, the SEC Investment Advisory Committee recommended (among other things) that the SEC draft a new definition of “accredited investor” for purposes of Rule 506 (c) so that an investor’s sophistication could be assessed. Plus, the Committee asked for a safe harbor provision on “reasonable steps.” I don’t see a 2013 Q1 timetable for enactment of Rule 506(c)….do you?

    • You are most likely right Steve. The SEC Commissioners 8/29 in their opinion commented that this process had been delayed 6 months. I would be surprised if it was done prior to departure of Mary. Originally we thought Mary may want 506 c to be her departure accomplishment but now we may need to wait for a new SEC Commissioner appointment, Treasury Secretary appointment possibly and possibly Obama inauguration. We wrote about this last Friday 10 Steps for Obama, the SEC and FINRA to Implement JOBS Act.

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