On Aug 29, 2012, the Securities and Exchange Committee in the U.S. proposed amendments to Regulation D under the Securities Act of 1933 that, if adopted, will change the way in which privately offered hedge funds and private equity funds raise funding.
These changes were first set out in the Jumpstart Our Business Strategies Act 2012 (the “JOBS Act”). The proposed amendments remove, subject to certain conditions, the existing prohibitions on general solicitation and advertising, including the use of publicly available websites, media broadcasts, mass email campaigns and public seminars or meetings.
General solicitation will be permitted provided that (1) all purchasers of securities are “accredited investors” and (2) the fund managers takes reasonable steps to verify that all purchasers of securities are accredited investors
Accredited investors are individuals with a net worth of at least US$1 million (excluding the value of their primary residence) or annual income exceeding US$200,000 (US$300,000 with a spouse) in the two most recent years and a reasonable expectation of the same income level in the current year.
It’s important for fund managers to take advice on what constitutes reasonable steps in the circumstances of their offering of securities in the fund. This will include an assessment of the nature of the investor, the basis on which the investor claims to be an accredited investor, information that the manager may already have on the investor, the nature of the offering and its terms, including any minimum investment amount, the manner in which the investor became aware of the offering and the amount of money proposed to be invested by the investor.
It will be necessary obtain some form of certification from the investor that it is an accredited investor and they adequate records should be kept of the steps taken to verify this.
We do not yet know when these proposed amendments will become effective. Until then, fund managers should not engage in any general solicitation of investors.