United States: SEC Issues Guidance On "Bad Actor" Rules

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.

Rule 506(d) provides that if an issuer can establish that it did not know, and in the exercise of reasonable care, could not have known that a bad actor disqualification existed, the issuer will not be subject to disqualification. The Guidance makes clear that this exception applies when, despite the exercise of reasonable care, the issuer (a) was unable to determine the existence of a disqualifying event, or that a particular person was a Covered Person, or (b) initially reasonably determined that the person was not a Covered Person but subsequently learned that determination was incorrect. The Guidance notes that issuers will still need to consider what steps are appropriate upon discovery of a disqualifying event or Covered Persons during the course of an ongoing offering. The Guidance states that an issuer may need to seek waivers of disqualification, terminate the relationship with Covered Persons, provide Rule 506(e) bad actor disclosure or take other remedial steps that address the disqualification.

Bad Actors: Affiliated Issuers, Placement Agents and Solicitors. The Guidance addresses the bad actor status of affiliated issuers, placement agents and solicitors.

The Guidance clarifies that an "affiliated issuer" of an issuer for purposes of bad actor disqualification and due diligence includes only affiliates of the issuer that are issuing securities in the same offering, including offerings subject to integration pursuant to Rule 502(a).

With respect to placement agents, an issuer can continue to rely on the Rule 506 exemption from Securities Act registration for future sales in an offering even though a placement agent experiences a disqualifying event while the offering is still ongoing if: (a) the engagement with the placement agent was terminated and the placement agent did not receive compensation for the future sales; or (b) if the disqualifying event affected only the covered control persons of the placement agent and such persons were terminated or no longer performed roles that would cause them to be considered Covered Persons for purposes of Rule 506(d).

The Guidance also provides that paid solicitors covered by Rule 506(d) are not limited to registered broker-dealers, but include all persons who have been or will be paid directly or indirectly, for solicitation of purchasers. However, a solicitor's directors and officers who participate in an offering are included in the list of Covered Persons if their participation includes involvement in due diligence activities, preparation of offering materials, providing structuring or other advice to the issuer in connection with the offering and communicating with the issuer, prospective investors or other offering participants about the offering. The Guidance clarifies that these activities must be more than transitory or incidental and do not include any persons whose sole involvement in the offering is as a member of a paid solicitor's deal or transaction committee that is responsible for approving such solicitor's participation in the offering, administrative functions, such as opening brokerage accounts, wiring funds and bookkeeping activities.

Disclosure. The Guidance makes clear that issuers may not waive the obligation to disclose past disqualifying events that occurred prior to the September 23, 2013 effective date of Rule 506(d). However, issuers are required to disclose only events that would have triggered disqualification at the time of the offering. With respect to solicitors, the Guidance clarifies that issuers are required to provide disclosure of past disqualifying events of all paid solicitors and their covered control persons who are involved with the offering to all investors, and not only to the investors that were solicited by such persons. However, issuers are not required to provide disclosure with respect to paid solicitors who are no longer involved in the offering.

Disqualification Triggers. The Guidance clarifies that disqualification is not triggered by actions taken in jurisdictions outside the U.S., such as convictions, court orders, or injunctions in a foreign court or regulatory orders issued by foreign regulatory authorities. The Guidance also provides that disqualification is triggered only by cease and desist orders from violations of scienter-based provisions of the federal securities laws and rules. Further, if an order issued by a court or regulator provides that Rule 506 disqualification should not arise as a result of the order, it is not necessary to seek a waiver from the SEC or to take any other action to confirm that a bad actor disqualification will also not apply as a result of the order.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions