On July 10, 2013, the Securities and Exchange Commission (the “SEC” or “Commission”) adoptedRegulation D of the Securities Act of 1933, as amended (the “Securities Act”) to implement Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The amendments to Rule 506 were originally proposed more than two years ago, on May 25, 2011. The final amendments to Rule 506 go into effect 60 days after their publication in
the Federal Register.
amendments to rules promulgated under
The amendments to Rule 506 include a new provision that prevents a bad actor (“Bad Actor”) from participating in offerings conducted under Rule 506 of Regulation D. The disqualification provisions apply to all Rule 506 offerings regardless of whether the issuer engages in general solicitation or advertising.
The Bad Actor provisions prohibit issuers as well as underwriters, placement agents, directors, executive officers, and certain shareholders from participating in Rule 506 offerings, if they have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws.
As amended, Rule 506 provides that Bad Actor disqualification arises from final orders finding the relevant person or entity violated a rule or regulation prohibiting “fraudulent, manipulative, or deceptive conduct.”
Rule 506 of Regulation D
According to the SEC, Rule 506 is the most widely used exemption from securities registration. Rule 506 provides an exemption from securities registration that allows an issuer to raise an unlimited amount of funds from the sale of securities from an unlimited number of accredited investors and up to 35 non-accredited investors if certain informational requirements are met. Securities sold in Rule 506 offerings are restricted securities and generally cannot be resold publicly by investors unless registered or pursuant to Rule 144’s safe harbor.
The Amendments to Rule 506
The Bad Actor disqualification provisions in Rule 506 apply to the following “covered persons”:
• the issuer and its predecessors;
• any affiliated issuer;
• any director, executive officer, other officer participating in a Rule 506 offering, or the issuer’s general partner, or managing member;
• any promoter as defined in Rule 405 of the Securities Act connected with the issuer in any capacity at the time of the sale of securities in a Rule 506 offering;
• any beneficial owner of 20 percent or more of any class of the issuer’s outstanding voting equity securities;
• any investment manager of an issuer that is a pooled investment fund;
• any person that has been or will be paid directly or indirectly compensation in any form for soliciting investors in connection with the Rule 506 offering;
• any general partner or managing member of any such investment manager participating in the Rule 506 offering; or
• any director, executive officer or other officer participating in the Rule 506 offering of any such investment manager or compensated person or general partner or managing member of such investment manager or person compensated for soliciting investors.
Disqualifying Events For Covered Persons in Rule 506 Offerings
Rule 506 as amended contains the following disqualifying events:
• Criminal convictions;
• Court injunctions and restraining orders;
• Final orders of federal regulators, including the U.S. Commodity Futures Trading Commission;
• Final orders of certain state regulators including securities, banking, and insurance regulators;
• SEC disciplinary orders relating to brokers, dealers, municipal securities dealers, investment advisers, and investment companies and their associated persons;
• Certain SEC cease and desist orders;
• Suspension or expulsion from membership in, or suspension or barring from association with a member of, a securities self-regulatory organization;
• SEC stop orders and orders suspending a Regulation A exemption; and
• U.S. Postal Service false representation orders.