Wavering on Waivers—Bad Boy/Bad Actor Waivers Under Federal and State Law (Part 4)

Seeking a Waiver From the SEC

Notwithstanding Commissioner Gallagher’s comments to the contrary, on March 13, 2015, the SEC Division of Corporation Finance issued updated guidance for persons seeking “Waivers of Disqualification under Regulation A and Rules 505 and 506 of Regulation D.” The guidance makes it clear that waivers will be treated separately from any enforcement proceeding that results in the disqualification and will be considered by the Division of Corporation Finance’s Office of Small Business Policy rather than by enforcement. When considering a waiver

request, the guidance advises that the Division will consider the following factors, with the understanding that no single factor will be dispositive:  

  • Who was responsible for the misconduct and what role the bad actor or actors have or had with respect to the party seeking the waiver. Depending on the circumstances and the conduct at issue, if misconduct committed by one or more individuals resulted in the waiver applicant’s disqualification, and the applicant removes or terminates its association with those individuals, the Division would generally view such actions taken as favorable to the waiver request.  
  • Whether the misconduct occurred over an extended period or whether it was an isolated instance.  
  • What remedial measures the party seeking the waiver has taken to address the misconduct, when those remedial measures began, and whether those measures are likely to prevent a recurrence of the misconduct and mitigate the possibility of future violations.  
  • The severity of the impact on the issuer or third parties, such as investors, clients or customers, if the waiver request is not granted, and weigh any such impact against the facts and circumstances relating to the misconduct to assess whether disqualification would be a disproportionate hardship in the light of the parties involved in, and the nature of, the misconduct. 


In Colorado

Like securities regulators in many states, the Colorado Securities Commissioner has the authority to issue cease and desist orders under C.R.S. §11-51-606(1.5), seek injunction under § 11-51-602, refer actions for criminal enforcement under § 11-51-603, or seek civil enforcement under § 11-51-604(14). Depending on how they are worded, orders issued by the Securities Commissioner or by a court in a state enforcement action may, or may not, fit within the Bad Actor Provisions of Rule 506(d). 


It is important for Colorado lawyers when working with clients before the SEC and the Colorado Division of Securities (or the securities agency of any other state) to understand that waivers may be separate from the enforcement discussion. Many, if not most, enforcement actions are resolved by consent, without a hearing or a trial. If defense counsel in a securities enforcement proceeding in a federal or state forum is not familiar with the Bad Boy and Bad Actor Provisions, the sanctions against a respondent can be much more severe than the language of the eventual order. Disqualification from capital raising Rules 505 or 506, or from the Colorado Crowdfunding Act (when available), can be an unexpected consequence of a consensual settlement. 

Furthermore, where Colorado has specific Bad Actor Provisions (such as those included in proposed H.B. 15-1246, the Colorado Crowdfunding Act), a federal waiver may not be sufficient to avoid disqualification under state law. Where the discussions with the SEC or with the State Division of Securities are likely to result in sanctions which may result in disqualification from various capital raising alternatives under federal or state law, counsel and their

clients should consider the ramifications before agreeing to any consensual order. That would be the time to discuss waivers and the concern that a federal waiver may not be sufficient under state law. Perhaps the concerns can be dealt with by limiting the language of the order; perhaps a waiver from the SEC and applicable state authorities will be required. The respondent should understand these issues before consenting to any sanction. 

Reprinted from The Colorado Bar Association, Business Law Section, May 2015

Herrick Lidstone