On December 4, the Securities and Exchange Commission’s Division of Corporation Finance issued 14 new Compliance and Disclosure Interpretations (C&DIs) with respect to Rule 506 under the Securities Act of 1933. These C&DIs relate to the rules recently adopted by the SEC (the Bad Actor Rule) that disqualify issuers from relying on Rule 506 for securities offerings involving certain felons and other so-called “bad actors” (the persons subject to the Bad Actor Rule being referred to as covered persons). The new C&DIs provide, among other things, that:
An issuer must determine if it is subject to bad actor disqualification any timeit is offering or selling securities in reliance on Rule 506. For example, in an offering that is continuous, delayed or long-lived, the issuer is required to update its factual “bad actor” inquiry periodically (including through bring-down of representations, questionnaires and certifications, etc.). If a placement agent or one of its covered control persons becomes subject to a “disqualifying event” under the Bad Actor Rule during an ongoing offering, an issuer may continue to rely on Rule 506 for future sales in that offering only if: (1) the engagement with the placement agent was terminated and the placement agent did not receive compensation for future sales; or (2) if the “disqualifying event” affected only such covered control persons, such persons were terminated or no longer performing roles for the placement agent that would cause them to be covered persons for purposes of the Bad Actor Rule.
“Covered persons” subject to the Bad Actor Rule include any person that has been or will be paid (directly or indirectly) for solicitation of purchasers in the offering as well as any director, executive officer, or other officer participatingin the offering of such a solicitor. The “participation” in an offering is not limited to the solicitation of investors, but rather includes such activities as involvement in due diligence, providing structuring or other advice to the issuer and communicating with prospective investors, so long as any such activity is “more than transitory or incidental.” Those performing administrative functions will generally not be presumed to be participating in the offering.
The Bad Actor Rule includes an exception to its disqualification provisions if the issuer establishes that it did not, and in the exercise of reasonable care could not, know about a disqualifying event. This reasonable care exception applies when, despite the exercise of reasonable care, the issuer was unable to determine the existence of a disqualifying event, was unable to determine that a particular person was a covered person, or initially determined that the person was not a covered person but subsequently learned that determination was incorrect.
The new C&DIs are available here.