Wavering on Waivers—Bad Boy/Bad Actor Waivers Under Federal and State Law (Part 1)

Many companies raise money through private placements under Regulation D, especially under Rules 505 and 506.  Many investment bankers assist companies in raising Regulation D capital. While there are a number of other exemptions from registration under federal law (including Rule 504 for up to $1 million; Rule 147 for intrastate exemptions; Rule 701 for compensatory benefit plans; and Regulation S for offshore transactions), Rules 505 and 506, and especially Rule 506, are by far the most frequently used exemptions. Those exemptions are not available to the extent the bad-boy disqualification rules apply.


The Long History of SEC Disqualifications

Rule 505, and Rule 240 before Rule 505 was effective, have been subject to certain disqualifications as defined in Rule 262 of Regulation A (17 CFR § 230.262). Rule 262 was first adopted in 1936 in SEC Rel. No. 33-632 (Jan 21, 1936) and was recently amended with the Regulation A+ rules adopted by the Securities and Exchange Commission (the “SEC”) on March 25, 2015 (SEC Rel. 33-9741). These disqualification provisions make the exemptions from registration under Regulation A and Rule 505 of Regulation D unavailable for an offering if, among other things, an issuer, any of its predecessors, or any affiliated issuer is subject to certain administrative orders, industry bars, an injunction involving certain securities law violations or specified criminal convictions. 

Disqualification also occurs if any of the issuer’s directors, officers, general partners, ten percent beneficial owners of any class of the issuer’s equity securities, or promoters, underwriters, persons compensated for soliciting purchasers, or any of the underwriters’ or paid solicitors’ partners, directors, or officers, is subject to administrative orders, injunctions, associational bars or specified convictions. SEC Regulation C, Rule 405 provides that a well known seasoned issuer (WKSI) can be disqualified from accessing the public capital markets on an accelerated and streamlined basis if it becomes an “ineligible issuer” as a result of administrative or civil sanctions, among other things. The definition of “ineligible issuer” was adopted with the WKSI rules in SEC Release 33-8591 (Aug. 3, 2005). 

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

Herrick Lidstone