The SEC’s “bad actor” rule under the Securities Act of 1933, discussed in a previous KirklandPEN (the Rule), disqualifies a private fund or other issuer from relying on the Regulation D Rule 506 private placement safe harbor if the issuer or certain affiliated persons com- mitted or were connected to a list of bad acts. Since the Rule’s September 2013 effective date, the SEC staff has released interpretations of the Rule,1 certain of which may substantially lessen issuers’ diligence obligations and limit the effect of penalties. Key recent interpreta- tions are below.
- Scope of Disqualifying Affiliates Narrowed. The Rule provides that “affiliated issuer” bad acts may disqualify an issuer’s Rule 506 private placement, which leads to concerns that a portfolio company disqualifying event could disqualify the fund itself (and other fund portfolio companies) from relying on Rule 506. The staff, however, has narrowly construed “affiliated issuer” to include only affiliates of the issuer that are issuing securities in the same or an “integrated” offering — an unlikely event when a private fund (including its parallel funds) is raising money — so portfolio company disqualifying events generally should not disqualify the fund’s (or other portfolio companies’) private placement exemption.
- Non-U.S. Disqualifying Events Disregarded. The staff stated that actions taken in jurisdictions other than the United States, such as convictions, court orders or injunctions in a non-U.S. court, or orders issued by non-U.S. regulatory authorities, will not trigger bad actor disqualification.
- Placement Agent Terminations May Limit Bad Actor Penalties. If a disqualifying event occurs with respect to a placement agent or one of its covered control persons while an issuer’s offering is ongoing, the staff permits an issuer to continue to rely on Rule 506 for that offering if (1) the issuerterminates its engagement with the placement agent and does not compensate the placement agent for future sales in that offering or (2) the placement agent’s problematic covered affiliated person is terminated or prohibited from performing roles at the placement agent covered by the Rule.