The Securities and Exchange Commission voted yesterday to lift the ban on advertising by funds, buyout firms and start-up companies seeking capital. This action will allow private equity funds to promote their products to the general public, though restrictions remain on who can invest in them. After the passage of the Dodd-Frank Act in 2010, Congress passed the Jumpstart Our Business Startups Act in April 2012. The Jumpstart Act directed the SEC to remove the prohibition on advertising under Rule 506. See the end of this article for a Fact Sheet from the SEC on the changes to Rule 506.
Currently, private equity funds need to register their securities with the SEC or get a Regulation D exemption under Rules 504, 505, or 506 with Rule 506 being the most widely-used exemption from registration. A firm raising a new fund under a 506 exemption can raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 other purchasers but is prevented, until now, from using general solicitation or advertising to market the fund.
The rule amendments will become effective in 60 days after publication in the Federal Register.
The following is a statement released by the SEC yesterday: We are adopting amendments to Rule 506 of Regulation D under the Securities Act of 1933 to implement Section 201(a) of the Jumpstart Our Business Startups Act. The amendment to Rule 506 permits an issuer to engage in general solicitation or general advertising in offering and selling securities pursuant to Rule 506, provided that all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that such purchasers are accredited investors. The amendment to Rule 506 also includes a non-exclusive list of methods that issuers may use to satisfy the verification requirement for purchasers who are natural persons.
Click on the following link for a Fact Sheet from the SEC on the changes to Rule 506: Eliminating the Prohibition on General Solicitation and General Advertising in Certain Offerings
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