On December 4, 2013, the SEC’s the Division of Corporation Finance issued additional Compliance and Disclosure Interpretations (the Guidance) on certain aspects of the “bad actor” rules under the Securities Act of 1933 that became effective on September 23, 2013. As described in our previous client alert on this topic, the new rules disqualify certain persons (known as “Covered Persons”) who have been the subject of specific disqualifying events from being involved in Reg D private offerings relying on Rule 506. That alert can be accessed by clicking here. The new Guidance clarifies the following aspects of Rules 506(d) and 506(e):
Reasonable Care. Issuers must determine with reasonable care if they are subject to bad actor disqualification any time they are offering or selling securities in reliance on the Rule 506 exemption from Securities Act registration. The Guidance clarifies that if an issuer is not offering securities, such as a fund that is winding down and is closed to investment, it need not determine whether Rule 506(d) applies unless and until it commences a Rule 506 offering. Instead, the issuer may rely on a Covered Person’s agreement to provide notice of a potential or actual bad actor triggering event. If, however, an offering is ongoing, the issuer must periodically update its inquiry by, for example, bring-down representations, questionnaires, certifications, negative consents, checking public databases and other steps depending on the circumstances.