Since its enactment, issuers—from the smallest start-ups to the largest investments and hedge funds—have used Rule 506 under the Securities Act of 1933 in the sale of securities. The Rule, which is the most widely used exemption from the registration requirements of the Act, generally allows issuers to sell an unlimited amount of securities to an unlimited number of accredited investors.
However, on September 23, 2013, Rule 506(d), which was adopted by the SEC pursuant to Section 926 of the Dodd-Frank Act, became effective. Rule 506(d) disqualifies security offerings involving certain felons and other “bad actors” from reliance on the oft-used Rule 506 exemption. Such a disqualification provision is not unheard of, as both Regulation A and Rule 505 have similar provisions; however, the provision will assuredly have a far greater impact in relation Rule 506 due to the wide use of the exemption.
All hope is not lost, though, because according to Rule 506(d)(ii), the disqualification shall not apply “upon a showing of good cause . . . if the commission determines that it is not necessary under the circumstances that an exemption be denied.” As such, the SEC will most likely receive requests for waivers from many issuers and others involved in securities offerings.
The SEC has granted exemptions to five issuers since the date the Rule became effective. Out of the five issuers granted exemptions, four were financial institutions. In their respective requests for waiver, the institutions generally cited facts that fell under the following categories: the bad conduct did not involve the offer or sale of securities pursuant to Regulation A or Regulation D; steps were taken to deal with the underlying conduct; and a disqualification under the Rule would have an adverse effect on third parties.
As the order or judgment giving rise to the disqualification, the letter from the institution requesting an exemption from the disqualification provision, and the letter from the SEC confirming the granting of the exemption all have the same date, it is likely that the exemption to the provision was granted to the financial institutions in relation to the settlement of the matters that were part of the orders.