Regulatory: The JOBS Act and materiality determination in private placements

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.

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 , either through a disclosure document, the due diligence process, or just by general access to the information, the investor needs to make an informed decision. These same cases decline to provide any bright-line test.

So, it remains a matter of judgment as to what would be important to investors, but companies should be particularly careful to ensure that investors have access to information about material or recent developments regarding the issuer, and that the information is up-to-date at the time of the sale.

Contributing Author

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Peter Fetzer

Peter Fetzer is a partner with Foley & Lardner LLP and focuses his practice on securities regulation, mergers and acquisitions, corporate governance and general corporate...

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