Presented by: Lance Friedler, PartnerRon S. Geffner, PartnerSadis & Goldberg LLP

JOBS ACTSEC Votes to Lift Ban on General Advertising and Solicitation by

Private Investment Funds

July 15, 2013

Lance S. Friedler practices in the firm’s Corporate andFinancial Services groups. Mr. Friedler regularly counsels clients on structuring and forming U.S. and non-U.S.

private investment funds, including the investment manager andgeneral partner entities to such funds. He also counselsinvestment managers on registration and ongoing compliance issues with the Securities and ExchangeCommission, including the preparation of all writtencompliance policies and procedures. His investment management experience is broad in scope and includes

the preparation and negotiation of seed capital arrangements and joint venture arrangements.

Lance S. Friedler, PartnerSadis & Goldberg LLP

Ron S. Geffner, PartnerSadis & Goldberg LLP

Ron S. Geffner is a partner of Sadis & Goldberg LLP and oversees the

Financial Services Group. He regularly structures, organizes and counsels

private investment vehicles, investment advisory organizations, broker-

dealers, commodity pool operators and other investment fiduciaries. Mr.

Geffner also routinely counsels clients in connection with regulatory

investigations and actions. Mr. Geffner began his legal career with the United

States Securities and Exchange Commission (SEC). His broad background

with federal and state securities laws and the rules, regulations and

customary practices of the SEC, Financial Industry Regulatory Authority,

Commodities Futures Trading Commission and various other regulatory

bodies, enables him to provide strategic guidance to a diverse clientele.

 

• New Rule 506(c) under Regulation D will permit general advertising and solicitation by private investment funds provided that they take reasonable steps to verify that all purchasers are “accredited investors” as defined in Rule 501 of Regulation D.Key takeaway – There is no restriction on who a private investment fund can solicit, but there are restrictions on who is permitted to purchase the private investment fund’s securities (such as LP or LLC interests or shares).

• “Accredited investors” include: i. an individual (alone or jointly with a spouse) with a net worth of at least $1 million

(not including the value of his or her primary residence); ii. an individual with adjusted gross income of at least $200,000 in each of the last 2

years (or $300,000 on a joint basis with a spouse) who reasonably expects to have such income in the current year; and

iii. an entity with at least $5 million in total assets.

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General Advertising and Solicitation

• The SEC has provided a non-exclusive list of methods that private investment funds may use to satisfy the verification requirements for individual investors, including:

i. Reviewing copies of any IRS form that reports the income of the investor and obtaining a written representation that the investor will continue to earn the necessary income in the current year; and/or

ii. Receiving a written confirmation from a) An SEC registered broker-dealer or investment adviser;b) Licensed attorney; orc) CPA.

Note: Such parties must take reasonable steps to verify the investors’ accredited investor status.

Key takeaway – All private investment fund subscription documents will need to be updated.

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General Advertising and Solicitation (cont.)

• The existing Rule 506 exemption (re-designated as Rule 506(b)) which allows private investment funds to accept up to 35 non-accredited investors and an unlimited number of accredited investors with whom there is a pre-existing and substantial relationship will continue to be in effect. A private investment fund relying on this exemption is not subject to the new verification procedures. Key takeaway – A private investment fund that wants to continue taking in non-accredited investors cannot publicly advertise or solicit.

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General Advertising and Solicitation (cont.)

• Currently a private investment fund that sells securities under Rule 506 is required to file a Form D with the SEC no later than 15 calendar days after the first sale of securities in an offering.

• The new rules will require that Form D:i. be filed at least 15 calendar days before engaging in general advertising

or solicitation;ii. be updated within 30 days of completing an offer.

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General Advertising and Solicitation (cont.)

• Currently, Form D requires identifying information about the private investment fund and its related persons (such as its general partner), the exception being relied on (such as Rule 506) and certain other factual information about the fund and its related persons.

• The new rules will require additional information, including:i. Identification of the private fund’s website.ii. Expanded information on the private fund.iii. The offered securities.iv. The types of investors in the offering.v. The use of proceeds from the offering.vi. Information on the types of general solicitation used.vii. The methods used to verify the accredited investor status of investors.

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General Advertising and Solicitation (cont.)

• The new rules will disqualify a private investment fund from using the Rule 506 exemption if it does not comply with the Form D filing requirements for a 1 year period beginning after the required Form D filing is made.

• The new rules will require certain legends or cautionary statements to appear in any written advertising or solicitation material. Such legends must inform potential investors that the offering is limited to accredited investors and that certain risks may be associated with the offering.

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General Advertising and Solicitation (cont.)

• If information about past performance is included in written advertising or solicitation material, additional information on the limitations of the usefulness of such information must be provided.

• Private investment funds will be required to submit written advertising and solicitation materials to the SEC through an intake page on the SEC website. This information would not be made available to the general public.

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General Advertising and Solicitation (cont.)

• Under the new rules, Rule 144A will be amended so that the private sales of restricted securities can be offered (including by means of general advertising or solicitation) to investors that are not QIBs as long as the restricted securities are sold only to persons whom the seller reasonably believes are QIBs.

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Rule 144A

• Under the new rules, an issuer cannot rely on the Rule 506 exemption if the issuer or any other person covered by the rule had a "disqualifying event.”

• The disqualification rule covers the private fund, as well as its predecessors and affiliated issuers, including:

• Directors and certain officers, general partners and managing members of the private fund;

• 20 percent beneficial owners of the private fund;• Promoters;• Investment managers and principals of private investment funds; and• Persons compensated for soliciting investors as well as the general partners,

directors, officers and managing members of any compensated solicitor.

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Disqualifications of Felons and Other Bad Actors from Rule 506 Offerings

• Under the final rule, a “disqualifying event” includes:• Criminal convictions;• Court injunctions and restraining orders;• Final orders;• Certain SEC disciplinary orders;• SEC cease-and-desist orders;• SEC stop orders;• Suspension or expulsion; and• U.S. Postal Service false representation orders.

• Disclosure of Pre-Existing Disqualifying Events – Disqualification applies only for disqualifying events that occur after the effective date of this rule. But matters that existed before the effective date of the rule and would otherwise be disqualifying are subject to a mandatory disclosure requirement to investors.

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Disqualifications of Felons and Other Bad Actors from Rule 506 Offerings (cont.)

• The final rules will become effective 60 days after publication in the Federal Register.

• All private investment funds relying on the CFTC 4.13(a)(3) exemption must exercise caution until the CFTC reconciles such exemptions with these new SEC rules.

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Conclusion

Sadis & Goldberg LLP Contact

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Ron S. Geffner, Partner

and Head of Financial Services

Sadis & Goldberg LLP

551 Fifth Avenue, 21st Floor

New York, NY 10176

rgeffner@sglawyers.com

212.573.6660   Direct Tel

www.sglawyers.com

The information contained herein was prepared by Sadis & Goldberg LLP for general purposes only. Its content should not be construed

as legal advice, and readers should not act upon the information in this presentation without consulting counsel. This information is presented without any representation or warranty as to its accuracy, completeness or timeliness. Transmission or receipt of this

information does not create an attorney-client relationship with Sadis & Goldberg LLP.

Lance Friedler, Partner

Sadis & Goldberg LLP

551 Fifth Avenue, 21st Floor

New York, NY 10176

lfriedler@sglawyers.com

212.573.8030 Direct Tel