Disqualification of Felons and Other "Bad Actors" from Rule 506 Offerings
SEC Open Meeting
July 10, 2013
Current Offering Process
Companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Rule 506 of Regulation D is the most widely-used exemption from registration.
Issuers relying on the Rule 506 exemption are prohibited from engaging in a general solicitation or general advertising - that is, advertising in newspapers or on the Internet among other things - in connection with securities offerings.
Dodd-Frank Act and JOBS Act
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 926 of the Dodd-Frank Act requires the SEC to adopt rules that would prohibit the use of the Rule 506 exemption for any securities offering in which certain felons and other bad actors are involved. This section also requires the new rules to be "substantially similar" to the bad actor disqualification provisions of Regulation A, another exemption from registration for certain small offerings.
After the passage of the Dodd-Frank Act, Congress passed the Jumpstart Our Business Startups Act (JOBS Act) in April 2012. Section 201(a)(1) of the JOBS Act directs the SEC to remove the prohibition on general solicitation or general advertising for securities offerings relying on Rule 506 provided that sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited. The Commission also will consider rules to implement this provision today.
Under the final disqualification rule approved today, an issuer cannot rely on the Rule 506 exemption if the issuer or any other person covered by the rule had a ";disqualifying event."
The final disqualification rule covers the issuer, including its predecessors and affiliated issuers, as well as:
Under the finalrule, a "disqualifying event" includes:
Reasonable Care Exception
The final rule provides an exception from disqualification when the issuer can show it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering.
Disclosure of Pre-Existing DisqualifyingEvents
Disqualification applies only for disqualifying events that occur after the effective date of this rule. But matters that existed before the effective date of the rule and would otherwise be disqualifying are subject to a mandatory disclosure requirement to investors.
The rule amendments will become effective in 60 days after publication in the Federal Register.