The SEC Blacklists Bad Actors ln Rule 506 Offerings
On July 10, 2013, the SEC approved a rule banning the use of the Rule 506 exemption from securities registration if the issuer and bad actors had a “disqualifying event.” The new ban on bad actors becomes effective 60 days after publication in the federal register.
The Rule 506 Bad Actor Blacklist
The SEC’s final disqualification of bad actors in 506 offerings covers the issuer, including its predecessors and affiliated issuers, as well as:
♦ Directors and certain officers, general partners, and managing members of the issuer.
♦ 20 percent beneficial owners of the issuer.
♦ Investment managers and principals of pooled investment funds.
♦ Persons compensated for soliciting investors as well as the general partners, directors, officers, and managing members of any compensated solicitor.
Disqualifying Events l Bad Actor Status in Rule 506 Offerings
Under the final rule, a “disqualifying event” for purposes of a Rule 506 offering includes:
♦ Criminal convictions in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries. The criminal conviction must have occurred within 10 years of the proposed sale of securities (or five years in the case of the issuer and its predecessors and affiliated issuers)
♦ Court injunctions and restraining orders in connection with the purchase or sale of a security, making of a false filing with the SEC, or arising out of the conduct of certain types of financial intermediaries. The injunction or restraining order must have occurred within five years of the proposed sale of securities.
♦ Final orders from the Commodity Futures Trading Commission, federal banking agencies, the National Credit Union Administration, or state regulators of securities, insurance, banking, savings associations, or credit unions that (i) bar the issuer from associating with a regulated entity, engaging in the business of securities, insurance or banking, or engaging in savings association or credit union activities, or (ii) are based on fraudulent, manipulative, or deceptive conduct and are issued within 10 years of the proposed sale of securities.
♦ Certain SEC disciplinary orders relating to brokers, dealers, municipal securities dealers, investment companies, and investment advisers and their associated persons.
♦ SEC cease-and-desist orders related to violations of certain anti-fraud provisions and registration requirements of the federal securities laws.
♦ SEC stop orders and orders suspending the Regulation A exemption issued within five years of the proposed sale of securities.
♦ Suspension or expulsion from membership in a self-regulatory organization (SRO) or from association with an SRO member.
♦ U.S. Postal Service false representation orders issued within five years before the proposed sale of securities.
Reasonable Care Exception in Rule 506 Offerings
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 its 506 offering.
Disclosure of Pre-Existing Disqualifying Events
Disqualification applies only for disqualifying events that occur after the effective date of the amendments to Rule 506. 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.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855