The Securities and Exchange Commission has released 14 new Compliance and Disclosure Interpretations to clarify rules pertaining to "bad actor" disqualifications from using the registration exemptions provided for Rule 506 offerings.

Issuers can be disqualified from relying on Rule 506 exemptions in a private offering if a covered person is guilty of proscribed actions. Among those covered are: issuer, including predecessors and affiliated issuers; directors, general partners, managing members, executive officers of the issuer, and other officers of the issuers that participate in the offering; 20 percent beneficial owners of the issuer; promoters connected to the issuer for pooled investment fund issuers, the fund's investment manager and its principal; and those compensated for soliciting investors, including directors, general partners and managing members.

Disqualifying events include: certain criminal convictions, court injunctions and restraining orders; final orders of state and federal regulators; SEC disciplinary orders, cease-and-desist orders, stop orders and suspensions; suspension or expulsion from membership in a self-regulatory organization, such as FINRA, or from association with an SRO member; and U.S. Postal Service false representation orders

Many disqualifying events include a look-back period (for example, a regulatory order issued within the last ten years). The SEC also provides an exception from disqualification when the issuer is able to demonstrate that 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 the offering. The steps an issuer should take to exercise reasonable care “will vary according to particular facts and circumstances,” the SEC says.

The SEC also offers the ability to seek waivers from disqualification and suggests a review of waivers granted under Regulation A for a sense of what might it might accept. Disqualification will not arise as a result of disqualifying events that occurred before Sept. 23, 2013, the effective date of the rule amendments, so long as they are disclosed in writing to investors. 

An issuer that is not offering securities, such as a fund that is winding down and is closed to investment, need not determine whether Rule 506(d) applies unless and until it commences an offering, the SEC says in its new guidance.

Other clarifications include:

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, the issuer continue to rely on Rule 506 for future sales. That, however, is contingent on the termination of the placement agent and that they do not receive compensation for future sales.

Compensated solicitors are not limited to brokers. All persons who have been or will be paid, directly or indirectly, remuneration for solicitation of purchasers are covered by Rule 506(d).

Participation in an offering is not limited to solicitation of investors. Examples include due diligence activities or the preparation of offering materials (including analyst reports used to solicit investors), providing structuring or other advice to the issuer in connection with the offering, and communicating with the issuer, prospective investors or other offering participants about the offering.

To constitute participation for purposes of the rule, “activities must be more than transitory or incidental.” Administrative functions, such as opening brokerage accounts, wiring funds, and bookkeeping activities, would generally not be considered as participating in the offering.

Disqualification under Rule 506(d) is not triggered by actions taken in jurisdictions outside the U.S.

Disclosure of past events that would no longer trigger disqualification, such as a criminal conviction that occurred more than ten years before the offering, is not required.

The “reasonable care” exception applies whenever the issuer can establish that it did not know and, or could not have known, that a disqualification existed, the SEC says. This can include inability to determine the existence of a disqualifying event or that an individual was a covered person.

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