SEC Proposes Rules Implementing Elimination of General Solicitation and Advertising Bans in Rule 506 and Rule 144A

August 29, 2012

The SEC proposed rules mandated by the JOBS Act that would eliminate the general solicitation and advertising prohibition in Rule 506 under the 1933 Act and a similar prohibition in Rule 144A under the 1933 Act.  Rule 506 is the safe harbor exemption most hedge funds rely upon to privately offer their unregistered interests to investors. 
To rely upon the proposed rules to engage in a general solicitation, the hedge fund would have to take reasonable steps to verify that the investors are accredited investors.  Under its proposal, the SEC did not set forth what steps the hedge fund would have to take to verify the accredited investor status of investors who are solicited.  Rather, the SEC’s proposal would give hedge funds the flexibility to come up with their own verification method.  The SEC stated that whether the steps taken are reasonable would require an objective determination by the hedge fund, based on the particular facts and circumstances of each offering and investor.  Factors that could be considered when reaching this determination would include the type of the accredited investor, the amount and type of information the hedge fund has about the accredited investor and the manner of the offering.
The SEC originally had proposed to adopt an interim final rule but instead opted to propose rules and receive comments on its proposal.
Click here to access the release proposing the rule.


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Investment Advisers, Investment Companies