It is not often that Congress passes a forward thinking, revolutionary new law with little debate or rancor. But that is exactly what happened with the JOBS Act, which was signed into law by President Obama on April 5, 2012. The gift from Congress is a little-noticed section of the new law that will allow private funds (such as commodity pools) to advertise and use the Internet to find investors.
Just about all CPOs and fund managers rely on a private offering exemption from registering the offering of interests in their funds under the Securities Act of 1933. Without this exemption, the sale of interests in the fund would be a public offering of securities under the Securities Act, which is expensive and time consuming.
Although it seems too obvious to even mention, the most basic concept of private offerings of funds has been that the offering be “private.” This has been interpreted to mean that general solicitation, including advertising, was not allowed. The prohibition on general solicitation and advertising is a major roadblock to finding investors for private pools. Fund sponsors had to have a pre-existing relationship with their investors or be introduced to them one-by-one. And, if the press wanted to write an article on the manager, the article could mention only the manager’s trading strategy generally and not the manager’s private fund, or risk “blowing” the fund’s private offering exemption. If the exemption was blown, the offering would become a public offering and the manager’s costs and compliance burdens would skyrocket. In early 2012, perhaps feeling frustrated by the slow recovery of the U.S. economy, Congress introduced a new piece of legislation called the “Jumpstart Our Business Startups Act,” or the JOBS Act. The bill contained a wide variety of provisions designed to stimulate small business, including entrepreneurs, and to relieve the burdens of federal securities regulation, including capital formation, on those small businesses.
Importantly for CPOs and fund managers, the JOBS Act directs the Securities and Exchange Commission (SEC) to revise Rule 506 of Regulation D to provide that the prohibition against general solicitations and general advertising (set forth in Rule 502) shall not apply to offers and sales of securities under Rule 506 so long as all the purchasers of such securities are “accredited investors.” The law also requires the SEC to adopt rules requiring the issuer of the securities (the CPO or fund manager) to take reasonable steps to verify that the purchasers are accredited. The JOBS Act requires the SEC to revise its rules within 90 days of enactment (July 5, 2012).
Ordinarily, a change in the law this dramatic and far reaching would be the subject of numerous SEC studies, hearings, industry input, proposed SEC rules, industry comment to such proposed rules, revised proposed rules, etc. The legislative record of the JOBS Act does not show any involvement by the SEC, which is highly unusual because the Act directs the SEC to amend drastically its private offering regime. Did Congress intend to keep the SEC in the dark? Was the SEC asleep? Or, did the SEC, in fact, know about this legislation but lack the political muscle to stop it from being passed?
Here, we attempt to answer some of the likely questions fund managers will have regarding the change.