The SEC is continuing to tie up some loose ends left over from the adoption of the Rule 506(d) bad actor disqualification rules. Obtaining certainty regarding these open items will be beneficial for issuers and placement agents of structured products to be issued under Rule 506 under the Securities Act.
A beneficial owner of 20 percent or more of an issuer’s voting equity securities is a covered person under Rule 506(d)(1) and could potentially be a bad actor subject to the rule’s disqualification provisions. In the adopting release for these rules, the SEC declined to adopt a bright-line definition of the term “voting equity securities.”8 Rather, the SEC stated that the term turned on “whether securityholders have or share the ability, either currently or on a contingent basis, to control or significantly influence the management and policies of the issuer through the exercise of a voting right.”9
Acknowledging that their initial interpretation may have been overbroad and that a “bright-line” test would be more workable, the SEC, in the recent Amendments to Regulation A Adopting Release, created a bright-line standard that is consistent with the definition of “voting securities” in Rule 405 of the Securities Act.10 “Voting equity securities,” for purposes of Rules 506(d)(1), 505 and 262(a) of the Securities Act, include only those voting equity securities which, by their terms, currently entitle the holders to vote for the election of directors. The right to vote must be presently exercisable. To clarify any confusion over the extinct “control or significantly influence” standard, the SEC stated that “’voting equity securities’ should be interpreted based on the present right to vote for the election of directors, irrespective of the existence of control or significant influence.”11
In another resolution of an outstanding item from the Rule 506 bad actor adopting release, on March 13, 2015, the SEC issued a policy statement in which it articulated standards for granting waivers from disqualification under Rules 262(a), 505 and 506 upon a showing of good cause that it is not necessary under the circumstances that the exemption be denied.12 The SEC stated previously that it would consider articulating standards for waivers in the future.13