The Securities and Exchange Commission (SEC) has outlined detailed provisions under Rule 506 of Regulation D, aimed at preventing "bad actors" from engaging in securities offerings. These provisions disqualify issuers, their affiliates, and certain "covered persons" from relying on Rule 506 exemptions if they have committed specific disqualifying acts. The rules also apply under Regulation A and Rule 505 with slight variations.

Who Are "Covered Persons"?

Covered persons under Rule 506 include:

• The issuer and its predecessors or affiliates.
• Directors, general partners, managing members, and executive officers participating in the offering.
• Beneficial owners holding 20% or more of voting equity securities.
• Promoters, compensated solicitors, and their control persons.

What Constitutes a Disqualifying Event?

Disqualifying events include:

• Certain criminal convictions and injunctions.
• Final orders from regulatory authorities, including SEC cease-and-desist orders.
• Membership suspensions or bars from self-regulatory organizations (SROs).
• Stop orders on registration statements or Regulation A offering statements.

Recent SEC Clarifications and Guidance

The SEC has provided clarity on several aspects of Rule 506 through compliance and disclosure interpretations (C&DIs), emphasizing the importance of reasonable due diligence. Key takeaways include:

• Issuers must update due diligence periodically during ongoing offerings.
• Disqualifications do not apply to foreign convictions or orders.
• Administrative and clerical activities do not qualify as "participating" in offerings.
• Waivers may be granted for good cause, especially if remedial actions have been taken.

Waivers and Exceptions

Issuers can apply for waivers to avoid disqualification if they can demonstrate that disqualification is unnecessary under the circumstances. The SEC considers factors like the nature and duration of the misconduct and remedial steps taken. However, the disclosure obligation under Rule 506(e) cannot be waived.

Conclusion

Navigating Rule 506's bad actor provisions requires careful attention to the roles and histories of all covered persons in a securities offering. Issuers should conduct thorough due diligence and implement robust compliance measures to avoid disqualification.