New rule to lift US restrictions on marketing real estate funds

The lifting of Rule 506 would allow managers of private funds with aggregate assets under management of $1trn (€780bn) in 2011 to target institutional investors without a public offering.

Yet the SEC’s proposal leaves untouched some of the concerns raised in state regulators’ submissions to the SEC over verification of accredited investors, with one regulator claiming failure to detail the verification process required of fund managers would leave investors vulnerable to “scam artists”.

In a move likely to be welcomed by fund managers, the proposal stipulates only that fund managers must take “reasonable steps” to ensure investors are accredited.

SEC chair Mary Schapiro said yesterday: “Whether the steps taken are reasonable would be an objective determination based on the particular facts and circumstances of each offering and investor.”

She added that she hoped the post-publication 30-day consultation period would throw up comments especially on this aspect of the proposal.

Backed by 75% of SEC commissioners, the proposal also includes revisions required in the JOBS Act to Rule 144A, which restricts secondary trading in funds to qualified institutional buyers (QIB) – effectively, large institutional investors.

In future, the seller would be required only to have a reasonable belief that the prospective buyer was a QIB, but would not be required “to follow uniform verification methods that may be ill-suited or unnecessary to a particular offering or purchaser, given the facts and circumstances”.

Schapiro has in recent months been scathing about what she sees as an “unachievable” 90-day deadline imposed by Congress for lifting restrictions required to make regulations compliant with the JOBS Act.

Although she yesterday accepted the “narrow mandate” imposed by the JOBS Act, she hinted that the SEC would look more thoroughly at private funds’ marketing in future.

Author: Shayla Walmsley

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