Complying With the SEC’s New Bad Actor Provisions

August 23, 2013

On August 2, 2013, we distributed a memorandum (the “Memorandum”) entitled “SEC Adopts Rules Disqualifying Certain Regulation D Offerings Involving Bad Actors” which discusses amendments to Rule 506 under Regulation D that disqualify securities offerings involving certain bad actors from reliance on the Rule 506 offering exemption. The disqualification and disclosure provisions under Rule 506(d) become effective on September 23, 2013 and a failure to comply may result in a loss of the ability to rely on the Rule 506 offering exemption.

It is important that advisers to private investment funds understand the implications of the disqualification and disclosure provisions under Rule 506(d).

We also suggest that advisers to private investment funds should be taking the following steps:

  • Identify funds that rely on Regulation D.
  • Identify all potential “Covered Persons” (including certain employees, fund directors and placement agents), as discussed in the Memorandum.
  • Determine whether any Covered Person has had a “Disqualifying Event”, as discussed in the Memorandum (such as by distributing and obtaining questionnaires and certifications from each Covered Person).
    • To the extent that a disclosure obligation exists, prepare adequate disclosure to be provided to offerees.
  • Review agreements and contracts with Covered Persons and, where necessary, obtain representations, covenants and/or certifications regarding whether such Covered Persons have had a Disqualifying Event.
  • Amend subscription agreements to require applicable investors to provide information about potential Disqualifying Events (or to include Disqualifying Events questionnaires).
  • Implement compliance policies or procedures addressing the determination of whether a Covered Person has had a Disqualifying Event.
  • Review fund documents to determine whether they contain appropriate authority to:
    • elicit information regarding potential Disqualifying Events,
    • disclose information relating to Disqualifying Events to offerees, as necessary, and
    • effect a prompt mandatory redemption or withdrawal in the event a beneficial owner could subject the fund to disqualification.


If you have any questions regarding the information discussed above, please contact your Investment Management Group attorney at Seward & Kissel LLP.