The SEC is continuing to tie up some loose ends left over from the adoption of the Rule 506(d) bad actor disqualification rules. 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% 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 disqualification provisions of that rule. In the adopting release for the Rule 506 bad actor disqualification rules, the SEC declined to adopt a bright line definition of the term “voting equity securities.” Rather, they 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.” See Release 33-9414 (July 10, 2013) at n.62 and accompanying text.
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 consistent with the definition of “voting securities” in Rule 405 of the Securities Act. “Voting equity securities,” for purposes of Rule 506(d)(1), Rule 505 and Rule 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. See Release 33-9741 (March 25, 2015) at n.763 and accompanying text. 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.” Release 33-7941 at page 204.
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. The policy statement can be found at: http://www.sec.gov/divisions/corpfin/guidance/disqualification-waivers.shtml. The SEC stated previously that they would consider articulating standards for waivers in the future. See Release No. 33-9414 at page 71.