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

As we have noted, the SEC has proposed rules under Section 926 of the Dodd-Frank Act to disqualify offerings involving felons and other “bad actors” and associated persons  from relying on Rule 506 of Regulation D in private placements.  The proposed rules will force issuers to make difficult judgments as to whether or not their offering will qualify for an exemption under Rule 506.

The SEC has sought to minimize the impact of the rules.  The proposed rule would provide 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 disqualification existed.  But how much protection does that really provide?

For instance, a 10% beneficial owner who has committed a disqualifying event will preclude the issuer from relying on Rule 506.  So a careful issuer might send all 10% owners a questionnaire to complete.  But what if the owner will not return it?  Has the issuer exercised reasonable care and can it proceed?

Broker-dealers and others who receive compensation from an offering can also preclude reliance on Rule 506 if they have been subject to a disqualifying event.  Practice may develop where the placement agents make representations to the issuer that no disqualifying events have occurred.  Can an issuer rely on those representations?  Or must it check FINRA, SEC and other data bases as well?

And must issuers headed toward an IPO even be more careful?  What if the underwriters look under rock the issuer has not turned over during due diligence and find something?

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

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Photo of Steve Quinlivan Steve Quinlivan

Steve has a strong reputation in M&A, securities and international transactions, offering a rare combination of excellence and value who presents well to boards. Steve represents clients across the United States in mergers and acquisitions, ESOPs, REITs, securities regulation, securities offerings, international transactions…

Steve has a strong reputation in M&A, securities and international transactions, offering a rare combination of excellence and value who presents well to boards. Steve represents clients across the United States in mergers and acquisitions, ESOPs, REITs, securities regulation, securities offerings, international transactions and financing matters. He uses his deep background in law, finance, accounting and project management to complete his clients’ most strategically important and challenging assignments.

2 Responses to Issuers Will Face Difficult Judgments Under Reg D Bad Actor Disqualifications

[…] Seemingly forgotten while hoards of people get ready to start posting adds selling securities on the internet is Section 926 of the Dodd-Frank Act.  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.  We have discussed some of the problems with Section 926 here. […]

[…] Seemingly forgotten while hoards of people get ready to start posting adds selling securities on the internet is Section 926 of the Dodd-Frank Act.  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.  We have discussed some of the problems with Section 926 here. […]

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