Attorneys and chief compliance officers have mixed views on whether dropping a ban on general solicitation under the Jumpstart Our Business Startups (JOBS) Act will create more or less compliance work for brokerages and hedge fund firms.

The Act is designed to stimulate the economy by loosening some restrictions on capital formation (Complianceintel.com, 3/14). Among other things, it eliminates the prohibition against general solicitation and general advertising in private placement offerings, provided the securities are bought only by accredited investors. But the law, which on this issue is worded similarly to a recent Managed Funds Association petition to amend Rule 502(c) of Regulation D (Complianceintel.com, 2/24), still requires that information does not mislead prospective investors.

Some attorneys say the provision may well create compliance hassles. For example, it may change how brokerages and hedge fund firms interact with reporters, as employees will be able to speak more freely without worrying about whether they are saying something that sounds like an offering. But once they put more information into the public arena, compliance officers will have a greater volume of information to vet because they will have to ensure that it is not misleading to prospective investors. They will need to put specific policies and procedures in place to monitor the accuracy of that information and give additional training to employees.

Brian Lane, a former director of the SEC’s Division of Corporate Finance and now partner with Gibson, Dunn & Crutcher, told CI the new law presents a mixed bag for compliance teams. On one hand, C/Os have until now focused on trying to keep people at their firms from sneaking out announcements through backdoor channels. They need to distinguish what can be made public from what is solicitation and isn’t allowed. “They walk a fine line because their people argue with them, ‘This is not advertising, this is not solicitation, this is newsworthy.’ And they’re not going to have to worry about that anymore. So the good news is, a lot of the hand wringing is over,” Lane said.

But on the other hand, C/Os will have to be very careful that their firms aren’t potentially selling to anyone who is not an accredited investor. “You can tell anyone about [an offering], but you’ve got to make sure that a retail customer doesn’t slip in,” Lane said. “If I had advice for a [C/O], it would be to put in place extra rigorous procedures to verify [whether buyers are accredited]...I think your procedures for verification have to be beyond reproach.”

That might mean ensuring there’s a file in the sales department with information on customers explaining why they are qualified, Lane said. “I would review all my procedures for verifying that the actual purchasers are qualified purchasers. Each [C/O] needs to review carefully with a view to updating and maybe making [procedures] more robust and rigorous.”

The client verification issue applies more to brokerages, as hedge fund firms should already be verifying that they have accredited investors. But brokers, acting as private placement agents, usually rely on certification from the buyer or a questionnaire, and there may be questions that arise under the Act over whether placement agents should be asking for tax returns, for example, as opposed to just relying on an investor certification. C/Os may need to address these issues at brokerage units, asking what kinds of procedures or controls are in place to ensure unqualified purchasers don’t sneak in.

Steven Yadegari, CCO and general counsel with Cramer Rosenthal McGlynn, said the workload for CCOs will undoubtedly increase, and that by how much depends on what the SEC deems “reasonable steps” regarding accredited investors. It might expect firms to simply collect a statement from investors attesting to their status. Or it might expect them to have buyers fill out questionnaires that would have to be collected and analyzed.

But Bruce Mendelsohn, partner with Akin Gump Strauss Hauer & Feld, said the law may reduce compliance workloads. “What you would say in your [private placement memorandum] is, ‘The only information that an investor should be relying on is the information that’s in the PPM and not extraneous statements from third parties,’” he said. “It seems to me that all the fund should have to worry about is, just like a public company, information that emanated from the fund itself.”

Under the bill, the SEC has 90 days after the date of enactment to revise Reg. D.