Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Section 926 of the Dodd-Frank Act directs the SEC to issue rules which would prevent the use of Regulation D Rule 506 offerings by certain “bad actors.”  The Dodd-Frank Act directs the SEC to adopt rules similar to the current disqualifiers in Regulation A.  The SEC rules must also prohibit Rule 506 offerings by persons subject to final orders which bar them from association with entities regulated by certain authorities, such as state securities commissions, or that have been convicted of any felony or misdemeanor in connection with the purchase or sale of any security. 

 The “bad actor” disqualifications of Regulation A can be found in Rule 262 of the Securities Act rules.  The disqualifications apply to all officers, directors and beneficial owners of 10% or more of any class of securities.  Assuming the SEC uses similar concepts to implement the Dodd-Frank Act, this has a number of implications for private companies raising capital.  Companies will need to be careful when selecting board members and officers to make sure they are not disqualified.  Likewise, care must be taken as to whom securities are sold to prevent a 10% beneficial owner from disqualifying the company.  In addition, modifications may be necessary to subscription documents.

 We recommend that public companies revise their annual officer and director questionnaires to solicit appropriate inquiries to determine eligibility for Rule 506 offerings if that is a likely method of corporate fund raising.  For example, it’s not unusual for a public company to rely on Regulation D when privately placing securities in an acquisition.