As of September 23, 2013, the new Securities and Exchange Commission (SEC) rule 506(d) is in effect which disqualifies Rule 506(b) and (c) private placement securities offerings if certain “bad actors” are involved, causing the private placement exemption to be lost, thus deeming the issuer to have engaged in an unregistered public offering and then giving investors the right to rescind their investment for a year. Private placement participants should amend and enforce their written policies and procedures to address this matter, as proper due diligence will be a “defense” against disqualification.
The involved applicable people that cannot meet this “bad actor” status for private placement securities officers consist of the investment managers (including sub-advisors), general partners or managing members of a fund, and their principals and officers. Other involved people include any officer involved in the private placement, the placement agent, issuer, other compensated solicitors, and each of their respective directors, executive officers, and holders of 20 percent of the voting securities of such entities.
Only “bad actors” who commit “bad acts” after September 23, 2013 are disqualified. “Bad acts” of registered representatives of broker-dealers should already be disclosed on their Central Registration Depository (CRD). Though there are some exceptions, each disqualifying bad act that constitutes a “bad actor” and the corresponding relevant look-back timeframe are as follows:
- Regulation A bad-actor stop-orders. 5 years.
- U.S. Postal Service false representation orders. Longer of 5 years or duration of order.
- CFTC orders (bar or final orders) relating to violations of any law or regulation that prohibits fraudulent, manipulative or deceptive conduct. Longer of duration of final order or 10 years from final order.
- SEC disciplinary orders for the duration of the order, which suspends or revokes such person’s registration as a broker, dealer, municipal securities dealer or investment adviser, limits such person’s activities function or operations, or bars person from association with any entity or from participating in an offering of penny stock.
- Suspension or expulsion for the duration, from membership or association with a national securities exchange or FINRA.
- Criminal convictions in connection with the sale of securities or making false statements to the SEC. Issuers: 5 years. All others (including issuer executive officers and directors): 10 years.
- SEC orders prohibiting future violations of any scienter-based anti-fraud provision, including Sections 5 and 17(a) of the Securities Act, and Sections 10(b) of the Securities Exchange Act. 5 years from date of order.
- Court orders, judgments or decrees in connection with the purchase or sale of securities or in connection with the business of an underwriter, broker, dealer, municipal securities dealer, investment advisor. 5 years.
- Final orders of certain regulators, including state securities commissions, state banking authorities, state insurance commissions, federal banking agencies or the National Credit Union Association, which bar the person from: (a) association with an entity regulated by such commission, (b) engaging in the business of securities, insurance or banking, or (c) engaging in saving association or credit union activities. Longer of duration of final order or 10 years from final order based on violation of fraudulent, manipulative or deceptive conduct, if applicable.
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