SEC to miss Reg D rules deadline

The Securities and Exchange Commission will miss its 5 July deadline to finalise its rules around general solicitation of private equity funds, the agency's chairwoman said.

The Jumpstart Our Business Startups Act (JOBS), which was passed into law in April, gave the SEC 90 days to craft rules around the law, and coincidentally the deadline is 4 July. The federal agency closes for the holiday, pushing the deadline to 5 July.

“As I stated to Congress prior to the passage of the act, time limits imposed by the JOBS Act are not achievable,” SEC chairwoman Mary Schapiro said in testimony Thursday. “Here, the 90-day deadline does not provide a realistic timeframe for the drafting of the new rule, the preparation of an accompanying economic analysis, the proper review by the commission, and an opportunity for public input.”

Schapiro gave no timeline for when the rules may be finalised, though she said SEC staff could finish its work on the JOBS Act, in the “near future”. “Staff has made significant progress on a recommendation and economic analysis, and it is my belief that the commission will be in a position to act on a staff proposal in the very near future,” Schapiro said.

The agency could choose to publish temporary rules to hit the deadline; the temporary final rules can be changed depending on public comment the SEC gets in the weeks and months they have been enacted.

GPs should remember that the rules have not been finalised, and so the ban on general solicitation remains in place, according to John Sabl, a partner in the corporate and securities practice group at law firm Sidley Austin.

“Right now, the rules have not been adopted yet. Therefore, the prohibition on the general solicitation remains in full force and effect,” Sabl said in an interview with Private Equity International.

“The SEC hasn’t proposed rules yet, nor has it given any indication of when it is going to adopt rules,” he said. “The SEC is playing its cards close to its vest.”

Among other things, the JOBS Act eliminates the ban on general solicitations that prevented private equity firms from publicly marketing their private equity funds. While, theoretically, GPs could advertise their private placement memoranda in print or broadcast media, they will still be allowed only to solicit “accredited investors”.

Among other things, the SEC is crafting a definition of “accredited investors”, according to testimony from Schapiro on Thursday. In the past, accredited investors earned that designation by meeting a few key characteristics, including net worth and income. The agency is working to determine if that is enough to be considered “accredited”. Schapiro said in her testimony the 90-day time frame was not enough time to get through the extensive analysis needed to decide the issue.

Once the rule is passed, GPs will likely tenatively approach the ability to be more open in their fundraising, according to Matt Kaplan, a partner at Debevoise & Plimpton.

“Most likely they will initially proceed with caution … there’s been a fair amount of discussion among GPs … about the forthcoming changes,” Kaplan said.