Regulatory: The JOBS Act And Materiality Determination In Private Placements

Author:Mr Peter Fetzer
Profession:Foley & Lardner

Originally published in InsideCounsel on June 13, 2012

Companies should take extra precautions to ensure that potential investors have all relevant information

As has been recently reported, the Jumpstart Our Business Startups (JOBS) Act has been signed into law. The JOBS Act is designed to encourage companies to create jobs by lowering hurdles to going public and complying with the laws governing public companies, and by facilitating the ability of companies to conduct private placements to finance their businesses.

One way in which the JOBS Act facilitates private placements is by requiring the Securities & Exchange Commission (SEC) to remove the current ban on general solicitation or advertisements, including social media, in private placements of securities, provided that all purchasers in the private placement are "accredited investors."

This change, when it becomes effective, will allow greater exposure to investments for a wider range of potential investors. The ability to solicit a wider range of potential investors will bring with it some additional challenges for companies conducting private placements. In the past, companies conducting private placements often solicited investments from a small group of sophisticated investors who were well versed in making such investments.

As companies expand their solicitation efforts to investors who are potentially less sophisticated, extra care should be taken to ensure that all material information is available to potential investors, particularly by ensuring that the private placement memorandum contains the information material to investors' decision-making process.

In a private placement with all accredited investors, there are no specific disclosure requirements under the securities law. However, companies conducting such a private placement must look to the anti-fraud provisions of the securities law, including related case law, and to SEC guidance. These sources indicate that in determining whether information is material and should be disclosed to potential investors, companies must look at what information a reasonable investor would need to make an informed decision.

In this regard, the applicable cases make it clear that companies must look at the total mix of the information, and consider what total mix of information...

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