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More and more questions are popping up on FINRA Exams concerning disqualifying events which prohibit certain bad actors from participating in private placement offerings.
With the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, certain “bad actors” are precluded from participating in offerings under Regulation 506. If any covered person has been the subject of a disqualifying event on or after September 23, 2013, the offering may not rely on an exemption under Regulation 506. Covered persons for this rule include:
If any person or entity listed above is subject to a disqualifying event, an offering may not take place under Regulation 506 unless an exemption is available through proper disclosure. A disqualifying event is any of the following:
Only those disqualifying events occurring after September 23, 2013 impact the offering. If the covered person was subject to a disqualifying event prior to that time, it only needs to be disclosed to potential investors and will not impact the availability of an exemption under Regulation 506. The rule provides for a reasonable care exception from disqualification, if the issuer is able to demonstrate that it did not know, and could not have reasonably known, that a covered person with a disqualifying event participated in the offering. Additionally, an issuer who is aware of a disqualifying event impacting a covered person may apply for a waiver to allow the offering to go forward even in light of the disqualifying event impacting the covered person. If a disqualifying event takes place during the offering of securities, the previous sales of securities will not be impacted, but future sales may not take place under regulation 506 unless the disqualifying event is waived or removed. If the issuer is unaware of the disqualifying event taking place during the offering period, the issuer may be able to rely on a reasonable care exception. Should the SEC issue a cease-and-desist order against a covered person that prohibits a covered person from committing a future violation, the order will only serve as a disqualifying event if issued within 5 years of the proposed sale. Further, only orders that remain in effect will be deemed to be disqualifying events. For example, A person who was barred indefinitely has the right to reapply for association after three years have passed. Should that person be permitted to reassociate, in a regulated capacity, the bar will have ended and the individual will no longer be subject to a disqualifying event.
Failure to Comply
SEC Rule 508 states that an insignificant deviation from a term or condition required under rule 504 or 506 will not result in the loss of the exemption provided under the rule so long as the person relying on the exemption can demonstrate the following:
We hope this article has helped you understand the impact of disqualifying events for certain bad actors.
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The Securities Institute of America
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