In early November, the House of Representatives passed four bills aimed to help small companies raise capital. The legislation received overwhelming bipartisan support, in large part due to legislators’ framing of the package as pro-jobs creation.
Of note, the package includes H.R. 2940, the Access to Capital for Job Creators Act (“Job Creators Act”), which was passed on November 3rd by a vote of 413 to 11. If enacted in its current form, the Job Creators Act would be a game-changer for private funds relying on exemption from registration under Section 4(2) of the Securities Act of 1933 (“Securities Act”).
Most private funds avoid registering their securities with the U.S. Securities and Exchange Commission (“SEC”) by relying on Section 4(2) and the “safe harbor” exemption found in Rule 506 under Regulation D of the Securities Act. Rule 506 allows companies to raise an unlimited amount of capital provided the underlying securities are not marketed through any form of general solicitation or general advertising. As such, managers of hedge funds and other private investment vehicles are generally prohibited from marketing such funds to potential investors with whom they do not have a preexisting relationship.
The Job Creators Act would remove the prohibition against general solicitation or general advertising of non-publicly traded securities, thereby permitting managers of hedge funds and other private offerings to publicly market such interests and raise capital from prospective investors regardless of whether a preexisting relationship exists. If enacted, the highly restrictive capital raising rules for private offerings would be upended in one fell swoop. Fund managers would effectively be able to target qualified investors through direct advertising, publicly available websites, offline and online forums that bring together investors with funds seeking additional capital, etc. This would mark a significant shift in the securities regulation landscape.
The capital formation relief is balanced by enhanced investor protection; notably, the prohibition against general solicitation or general advertising of interests in private offerings is eliminated, provided that all purchasers of such securities are accredited investors. This would effectively discontinue the practice of offering interests in private funds to certain non-accredited investors possessing the requisite sophistication and investment experience to invest in a hedge fund or other private offering. Further, the Job Creators Act directs the SEC to adopt regulations requiring issuers utilizing general solicitation or general advertising to verify that all investors are accredited (as opposed to relying on investor self-certification, as currently permitted).
Considering the current political climate and momentum behind the legislation package, the Job Creators Act could be enacted swiftly over the next few months. We will be monitoring the progress of the Job Creators Act closely and keep you apprised of any developments.
In the interim, the text of H.R. 290 can be found here.
Please contact us if you have any questions regarding H.R. 290 or its potential impact on private offerings.
