As we approach the anniversary of the effectiveness of the Rule 506 bad actor provisions (if you don’t happen to have it marked on your calendar, the new rules went into effect on September 23, 2013), it is a good time to survey how issuers and placement agents have adapted in response to the new rules.
Since the new rules became effective, the Securities and Exchang
e Commission Division of Corporation Finance has issued several sets of Compliance and Disclosure Interpretations (C&DI 260.14–260.32).1
Some of the C&DIs are applicable to Rule 506 continuous offering programs.
The Compliance and Disclosure Interpretations For example, C&DI 260.14 states, in part:
When is an issuer required to determine whether bad actor disqualification under Rule 506(d) applies?
Rule 506(d) disqualifies an offering of securities from reliance on a Rule 506 exemption from Securities Act registration. Issuers must therefore determine if they are subject to bad actor disqualification any time they are offering or selling securities
in reliance on Rule 506… An issuer may reasonably rely on a covered person’s agreement to provide notice of a potential or actual bad actor triggering event pursuant to, for example, contractual covenants, bylaw requirements, or an undertaking in a questionnaire or certification.
However, if an offering is continuous, delayed, or long-lived, the issuer must update its factual inquiry periodically through bring-down of representations, questionnaires, and
certifications, negative consent letters, periodic re-checking of public databases, and other steps,depending on the circumstances.
A placement agent in a continuous offering program should consider including an issuer covenant in the placement agent agreement to the effect that the issuer has exercised reasonable care to determine whether any covered person is subject to a bad actor disqualification, and that the issuer will notify the placement agent in writing of any bad actor disqualification relating to any covered person, or any even
t that would, with the passage of time, become such a disqualification event. The placement agent may wish to include in the placement agent1
The Compliance and Disclosure Interpretations can be found at:
Attorney Advertisement agreement an issuer covenant to periodically update its factual inquiries of any covered persons.
Similarly, the issuer may want to include a mirror representation from the placement agent regarding periodic inquiries of any
of the placement agent’s covered persons.
The timing of periodic updates by an issuer or a placement agent in a continuous offering program remains open; the SEC has not, and probably will not, identify a specific timeline.
The SEC previously stated that “[t]he timeframe for inquiry should also be reasonable in relation to the circumstances of the offering and the participants.”2