The JOBS Act will soon allow hedge funds to advertise to a greater pool of investors, as long as the funds make sure that the investors are indeed accredited. The only problem is that the SEC has yet to establish clear guidelines how to safely do so.
In a recent comment letter to the SEC, the Hedge Fund Association (HFA), an international not-for-profit representing investors, hedge funds and service providers, requested clear guidance on what hedge funds should do to verify whether investors are accredited.
Per our prior blog post on the JOBS Act, the regulations recently proposed by the SEC require only that hedge fund managers take “reasonable steps” to verify the status of potential investors. While the standard is arguably flexible, it also leaves a lot of uncertainty.
“The SEC’s pragmatism is notable in its ‘reasonable steps’ standard, but managers need to know that what they are doing is legal before they will take advantage of new opportunities given by this law,” said Richard Heller, chairman of the HFA’s Regulatory and Government Advisory Board and author of the letter on behalf of the HFA.
The HFA encouraged that the SEC introduce a “safe harbor,” while urging that any new rules not be too onerous.
“At the same time as lack of legal clarity can cripple businesses with uncertainty, clear laws which demand too much of investors and issuers can dampen the interest in allocating capital to private companies while greatly adding to fund managers’ operating expenses,” said Mitch Ackles, President of the HFA. “In drafting final regulations, we ask the SEC to keep this in mind and to remember the original intent behind JOBS Act – to invigorate the economy,” he added.
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