On December 4, 2013, the Division of Corporate Finance of the SEC released new Compliance & Disclosure Interpretations (CD&Is) relating to the "bad actor" provisions of Rule 506(d) and the "bad acts" provisions of Rule 506(e), both promulgated under Regulation D. While some of the interpretations provide clarity on difficult issues, others confirmed expected SEC positions (e.g., that "bad acts" only pertain to those in U.S. jurisdictions and that issuers must provide disclosures regarding all compensated solicitors involved in an offering).

The fourteen additional CD&Is provide guidance on:

  • When an issuer must determine if Rule 506(d) bad actor disqualification applies
  • If an issuer can rely on Rule 506 if a disqualifying event with respect to a placement agent or a covered person (e.g., a managing member or executive officer) occurs while an offering is ongoing
  • The definition of an "affiliated issuer" in light of Rule 506(d)
  • If only brokers who are subject to Exchange Act Section 15(a)(1) are deemed to be compensated solicitors
  • If the word "participating" includes individuals with limited involvement in a Rule 506 offering
  • If a compensated solicitor's officers are "participating" in a Rule 506 offering if they only solicit investors
  • Actions outside U.S. jurisdictions prompting a Rule 506(d) disqualification
  • Rule 506(d)(1)(v) disqualification due to SEC orders to cease and desist in regards to Exchange Act Section 10(b) violations
  • The need to seek an SEC waiver or other action to determine the application of a bad actor disqualification in light of a court or regulatory order stating that disqualification should not apply
  • The reasonable care exception in circumstances in which reasonable care was exercised but the existence of a disqualifying event was not uncovered
  • Rule 506(e) procedures for issuers seeking waivers in regards to disclosing events that occurred before September 23, 2013, that would have been disqualifying events before that date
  • Disclosing past events that no longer trigger a Rule 506 disqualification
  • Rule 506(e) disclosure requirements under circumstances in which multiple placement agents or other compensated solicitors are used by an issuer
  • The need to provide disclosure pursuant to Rule 506(e) with respect to all solicitors involved throughout an offering

The full text of the questions and answers is accessible on the SEC website in the link below.

Compliance and Disclosure Interpretations / Questions and Answers: http://www.sec.gov/divisions/corpfin/cfnew.shtml