Bad-Boys, Bad-Boys What You Going to Do? In lieu of doing a public offering of securities, funds issuing securities can rely on an exemption from registration. Regulation D is one of those exemptions. In 2010, Congress passed the Dodd-Frank Act. That law specifically ordered the SEC to prohibit felons and other bad actors from utilizing Rule 506 of Reg. D to issue securities pursuant to the before-mentioned “safe harbor.” Persons who are subject to the ban include promoters, directors, investment managers or those owning more than twenty percent (20%) of the issuer’s securities. The “bad boy” behavior that would prevent one from using Rule 506 of Reg D includes:
i) criminal convictions;
ii) injunctions and restraining orders related to securities;
iii) final orders from other securities regulators, banking regulators and the CFTC;
iv) SEC disciplinary orders, SEC “cease and desist” orders, and SEC “stop orders;”
v) suspension or expulsion of broker-dealers (B-Ds) or registered representatives from the NASD, FINRA, NYSE; and
vi) U.S. Postal Service “false representation orders.”
The length of time for the bar on events listed above is either within five (5) or ten (10) years. While the disqualification events listed above would have to occur after the effective date of the amended Rule 506, matters previously existing and that would otherwise fall under the rule, are subject to mandatory disclosure to investors. The amended Rule 506 becomes effective in mid-September.
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