Is the SEC capable of blushing? Increasingly, there are occasions in which the Securities and Exchange Commission takes positions so inconsistent with the protection of investors and its own history and so deferential to the industry that one has to ask: What were they thinking? How can a federal agency be that tone deaf? This column will, first, examine the SEC's new policy toward when "bad actors" can use the vastly expanded Rule 506 and, second, focus on how these rules will likely be gamed.
In Release No. 33-9414 (July 10, 2013),1 the Commission has adopted rules to disqualify "felons and other 'bad actors' from Regulation D offerings."2 These rules were mandated by §926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which also instructed the SEC that its disqualification rules for Rule 506 offerings were to be "substantially similar" to the existing "bad actor" disqualification rules long contained in Rule 262 of Regulation A. However, §926 also expanded the list of disqualifying events. The new disqualification rules, which are set forth in a new Rule 506(d), are important for several reasons: First, almost all Regulation D offerings are done under Rule 506.3 Second, the use of Rule 506 is about to increase exponentially, as the JOBS Act has mandated that the SEC permit general solicitation and general advertising in connection with a private placement made pursuant to Rule 506 (at least if all purchasers are "accredited investors").4 Third, the disqualification rules will likely affect future settlement negotiations in SEC enforcement cases.
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