My name is Tilden Moschetti, securities attorney with the Moschetti Syndication Law Group. We specialize in Regulation D offerings under Rules 506b and Rule 506c. Today we’re going to talk about Rule 506d, like dog, standing for bad actors. If you think you might be one, or if you think you might be working on an offering with one, you can’t miss this video.

Having an office in LA, I know a thing or two about bad actors. But seriously, right now we’re talking about bad actors in terms of those people who we don’t want to be participating in the offering of securities. In fact, it is forbidden. Regulation D Rule 506d like dog talks about what a bad actor is and what they can and cannot do, which is they can pretty much do nothing when it comes to an offering until a period of time has lapsed, and then they must do other certain things.

Let’s go through it in detail by doing a deep dive into the regulation itself. Here is Regulation D Rule 506d like dog, in 17 Code of Federal Regulations, 230.506 talking about subsection D. Rule 506d applies to people doing 506b and 506c offerings.

From a higher level, what the SEC is doing is laying out a groundwork of who we don’t want participating in the offering of securities, whether they’re registered or not. What it says in D.1 is that there is no exemption under this section for the sale of securities if the issuer, predecessor of the issuer, any affiliated issuer, any director, executive officer, officer participating, general partner, managing member, beneficial owner of 20% or more of the outstanding voting equity securities are disqualified.

This excludes investors who come in and maybe own 25% but don’t have voting rights. That’s another reason we like to not include a lot of voting in equity securities for our investors, in case somebody chooses to invest more than 20%.

Any of those people cannot participate at all. It will be considered a failed Regulation D and not exempt. When you’re not exempt, it is considered a public security, which requires registration. Failure to do that is a securities violation, which you can go to jail for. So a bad actor participating in an offering can go to jail and cause all sorts of trouble.

Let’s go through who those bad actors are:

  1. Anybody convicted within 10 years before the sale of the security (or 5 years for issuers, predecessors, and affiliated issuers) of any felony or misdemeanor in connection with the purchase and sale of any security, making a false filing with the Commission, or arising out of the conduct of business as an underwriter, broker-dealer, municipal securities dealer, investment advisor, or paid solicitor of purchasers of securities.
  2. The subject of an order, judgment, or decree of any court entered within 5 years that restrains or enjoins them from engaging in any conduct or practice in connection with the purchase or sale of securities, making false filings with the Commission, or arising out of the conduct as an underwriter, broker-dealer, municipal securities advisor, investment advisor, or paid solicitor of purchasers of securities.
  3. Similar to number 2, but for state securities regulators.
  4. Subject to an order of the Commission that suspends or revokes their registration as a broker-dealer, municipal securities dealer, or investment advisor, or places limitations on their activities or functions.
  5. Subject to an order of the Commission entered within 5 years that orders them to cease and desist for committing or violating anti-fraud provisions.
  6. Suspended or expelled from membership or barred from association with any national securities exchange or registered national affiliated securities association for conduct inconsistent with just and equitable principles of trade.
  7. Has filed or was named as an underwriter in any registration statement or Regulation A offering statement within 5 years that was subject to a refusal order, stop order, or order suspending the exemption.
  8. Subject to a United States Postal Service false representation order entered within 5 years, or subject to a temporary restraining order or preliminary injunction for conduct alleged to constitute a scheme or device to obtain money or property through the mail by false representations.

There are a few cases where the bad actor disqualification doesn’t apply:

  1. For any conviction, order, judgment, etc., that occurred before September 23, 2013.
  2. Upon a showing of good cause and without prejudice, if the Commission determines it’s not necessary.
  3. If before the sale, a court enters an order relieving the disqualification.
  4. If the issuer establishes it didn’t know and, in the exercise of reasonable care, could not have known about the disqualification.

If you’re allowed to do a Reg D offering but would have been considered a bad actor, you must disclose to investors, in a reasonable time prior to the sale, a description of the matters that would have triggered disqualification.

What does all this mean to you? You’re probably either in the camp of “I’m not a bad actor” or “I might be a bad actor.” If you are a bad actor, you’re not going to be doing a Regulation D offering. If you’re not a bad actor but are still unsure, let me clarify: If you had a DUI two years ago, this doesn’t apply to you. We’re trying to exclude people who committed fraud and actions that would affect the system itself of being able to offer securities and the trust needed from investors.

If you’re contemplating whether this applies to you, it’s very unlikely that it does. If it does, we should talk on the phone to discuss whether you qualify as a bad actor and are barred during that time period, or if it’s past the timeline and you can still do the offering with proper disclosure.

Again, my name is Tilden Moschetti. I hope that clears up some of this mystique about bad actors. If it’s something completely unrelated to fraud or anything really dealing with securities, you’re probably not a bad actor. Feel free to give me a call if there’s anything I can do for you in helping you put together your 506b or 506c offering.