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Speech by SEC Commissioner:
Excluding Established Wrongdoers from Engaging in Rule 506 Transactions


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

Open Meeting
Washington, D.C.
May 25, 2011

Right now, anyone can participate in Rule 506 offerings. Even a convicted felon, fresh out of prison, could solicit millions of dollars from unsuspecting investors. This is a reality — convicted fraudsters really do participate in Rule 506 offerings. For example, last year, the SEC filed an emergency action to stop a convicted felon who was operating a multi-million dollar fraud in unregistered securities.1 Additionally, just two weeks ago the SEC sued a recidivist for defrauding investors in unregistered securities offerings.2

Today’s proposal takes a step to addressing this loophole by implementing Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under this provision, the Commission is required to disqualify felons and other bad actors from participating in unregistered securities transactions effected pursuant to Rule 506.3

Rule 506 is by far the most frequently used SEC exemptive rule to facilitate unregistered securities offerings.4 Led by Rule 506, the market for private placements is both large and active.5

Unfortunately, the growth of the private market for capital-raising seems to have been accompanied with an increase in fraudulent offerings. For example, in early 2010, the state securities regulators testified before the Financial Crisis Inquiry Commission that “[they had] observed a steady and significant rise in the number of offerings made pursuant to Rule 506 that are later discovered to be fraudulent.”6

Against this backdrop, I support today’s proposal. Today’s proposal would make it unlawful for convicts, recidivists, and other wrongdoers like them, to participate in Rule 506 offerings.

However, the proposal, even if adopted, can be only a partial solution to the problems with Rule 506. For one thing, felons may not refrain from engaging in a 506 offering just because the Rules deny them the privilege. Let’s face it, these are individuals who have already demonstrated serious contempt for the law.

Recognizing these limitations, however, the proposal should be a step in the right direction. Issuers who wish to rely on Rule 506 will have to scrub their offerings to make sure disqualified wrongdoers don’t have a second chance to engage in misconduct.

I look forward to public comment on the proposal. I ask commenters to help us craft amendments that will be effective in increasing the integrity of the private placement market and preventing felons and other wrongdoers from being able to continue to damage this market and harm investors.

In addition, as others have noted this morning, there is a robust solicitation of comment on whether the disqualification provisions should apply uniformly across all of the SEC’s offering exemptions and safe harbors. I look forward to what commenters have to say on this issue.

I want to end by thanking the staff for their work on this proposal.

1 http://www.sec.gov/litigation/litreleases/2010/lr21584.htm

2 http://www.sec.gov/litigation/litreleases/2011/lr21969.htm

3 Responding to the widespread misconduct leading up to the Great Depression, the Securities Act of 1933 generally requires that offers and sales of securities be registered with the Commission, and subject to disclosure. Rule 506 of Regulation D is one of several exemptions from the general registration requirement. Rule 506 permits an issuer to raise an unlimited amount of money from an unlimited number of accredited investors without providing any disclosure. In those transactions where disclosures are made voluntarily, there are no minimum standards and no one at the SEC reviews them.

Rule 506 carves out a broad safe harbor from the general registration requirements of the Securities Act. Qualification for the safe harbor is a privilege, not a right, and the SEC has a duty to maintain the integrity of the safe harbor.

4 As stated in the proposing release: “For the year ended September 30, 2010, we received 17,292 initial filings for offerings under Regulation D, of which 16,027 claimed a Rule 506 exemption, 254 claimed a Rule 505 exemption, 713 claimed a Rule 504 exemption and 151 claimed both Rule 504 and 506 exemptions. Transactions relying on Regulation A or Regulation E are rare; for the year ended September 30, 2010, seven Regulation A offerings and one Regulation E offering were completed.”

5 The SEC’s Inspector General estimated that, in 2008 alone, over $600 billion of privately placed securities were sold, and over 20,000 offerings were conducted. See Report No. 459: Regulation D Exemption Process, Office of Inspector General, U.S. Securities and Exchange Commission, at 2 (March 31, 2009). http://www.sec-oig.gov/Reports/AuditsInspections/2009/459.pdf

6 Testimony of Denise Voigt Crawford, Commissioner, Texas Securities Board and President, North American Securities Administrators Association, Before the Financial Crisis Inquiry Commission, January 14, 2010.



Modified: 05/25/2011