The SEC’s bad actor rules are causing a great deal of consternation amongst lawyers who are being asked to give opinions that the offer and sale of securities do not require registration under the Securities Act of 1933. Historically, these opinions were usually based (albeit not always explicitly) on the non-exclusive safe harbor of Rule 506. The addition of bad actor disqualification in new Rule 506(d) is raising concerns for a number of reasons, including:

  • The large number of potential covered persons;
  • The unanswered interpretational questions, such as what it means for an officer to participate in an offering; and
  • The fact that some covered persons (e.g., minority investors) may not cooperate in providing information.

To the extent that a lawyer is asked to opine that there are no “bad actors”, this would seem to be no opinion at all but a factual confirmation. Such a confirmation could be obtained from anyone who was willing to take the risk.

I expect that opinion givers will be tempted to assume in their opinions that no covered person is a ”bad actor”. However, this assumption comes close to making the opinion worthless because it removes one of the key conditions to the exemption. In the old days (i.e., before September 23), this wouldn’t have been as great a problem because issuers could always fall back on Section 4(2) of the Securities Act and (hopefully) a corresponding state private placement exemption. Now, issuers are likely to be engaging in general solicitations in reliance on the SEC’s other amendment to Rule 506. If these issuers lose the Rule 506 safe harbor, they are likely to have lost the Section 4(2) exemption, federal preemption and equivalent state law exemptions.