New Rule 506 C&DI’s Require Some Explaining


Nancy Wojtas, the head of the public companies group at Cooley LLP, alerted me to the fact that the SEC staff yesterday issued 14 new Compliance & Disclosure Interpretations (C&DIs) relating to Rule 506 under Regulation D.  Here’s my take on three of them.

Question 260.15

Question: If a placement agent or one of its covered control persons, such as an executive officer or managing member, becomes subject to a disqualifying event while an offering is still ongoing, could the issuer continue to rely on Rule 506 for that offering?

Answer: Yes, the issuer could rely on Rule 506 for future sales in that offering if the engagement with the placement agent was terminated and the placement agent did not receive compensation for the future sales.  Alternatively, if the triggering disqualifying event affected only the covered control persons of the placement agent, the issuer could continue to rely on Rule 506 for that offering if such persons were terminated or no longer performed roles with respect to the placement agent that would cause them to be covered persons for purposes of Rule 506(d). [Dec. 4, 2013]

Readers may recall that this was a question that I touched upon in When Directors Are Or Become Bad Actors . . . .  and in If One Bad Actor Spoils The Whole Barrel, What’s An Issuer To Do?  As I discussed in those posts, removing offending covered persons may be easier said than done.

Question 260.16

Question: For purposes of Rule 506(d), does an “affiliated issuer” mean every affiliate of the issuer that has issued securities?

Answer: No.  Under Rule 506(d), an “affiliated issuer” of the issuer is an affiliate (as defined in Rule 501(b) of Regulation D) of the issuer that is issuing securities in the same offering, including offerings subject to integration pursuant to Rule 502(a) of Regulation D.  Securities Act Forms C&DIs 130.01 and 130.02 provide examples of co-issuer or multiple issuer offerings. [Dec. 4, 2013]

This was a question that I wrote about last September. I like the staff’s answer, but it does seem inconsistent with the staff’s previously published Bad Actor Disqualification Small Entity Compliance Guide.  The C&DI also causes me to wonder why use the term “affiliated issuer” since a co-issuer is already covered by the term “issuer”?

Question 260.17

Question: Are compensated solicitors limited to brokers, as defined in Exchange Act Section 3(a)(4), who are subject to registration pursuant to Exchange Act Section 15(a)(1), and their associated persons?

Answer: No.  All persons who have been or will be paid, directly or indirectly, remuneration for solicitation of purchasers are covered by Rule 506(d), regardless of whether they are, or are required to be, registered under Exchange Act Section 15(a)(1) or are associated persons of registered broker-dealers. The disclosure required in Item 12 of Form D expressly contemplates that compensated solicitors may not appear in FINRA’s Central Registration Depository (CRD) of brokers and brokerage firms. [Dec. 4, 2013]

My problem with this response is that it seems to be utterly lacking in metes and bounds.  For example, if an issuer pays a website owner a flat (i.e., not performance based) fee to post offering materials, would that constitute the payment of remuneration for solicitation of purchasers?  Now that general solicitation is no longer an automatic bar to reliance on Rule 506, it seems likely that there are more persons who arguably are being paid “for solicitation of purchasers”.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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