Ongoing Compliance with the SEC’s Bad Actor Provisions

August 22, 2014

In August 2013, we distributed two memoranda entitled “SEC Adopts Rule Disqualifying Certain Regulation D Offerings Involving Bad Actors” and “Complying with the SEC’s New Bad Actor Provisions” which discuss amendments to Rule 506 under Regulation D that disqualify securities offerings involving certain bad actors from reliance on the Rule 506 offering exemptions and compliance thereunder. The disqualification and disclosure provisions under Rule 506(d) and Rule 506(e) became effective on September 23, 2013 and depending on the steps initially taken to comply with the provisions, advisers to private investment funds should consider whether any additional steps should be taken at this time.

The staff of the Securities and Exchange Commission (“SEC”) has indicated that for continuous and long-lived offerings, an issuer relying on the Rule 506 offering exemptions may establish reasonable care under Rule 506(d) in part by updating its factual inquiry of relevant offering participants on a reasonable basis. Although the frequency and degree of updating depends on the circumstances of the issuer, the offering and the participants involved, in the absence of facts indicating that closer monitoring would be required, periodic updating could be sufficient. Specifically, the staff of the SEC has indicated that it expects issuers will manage this periodic updating through, among other steps:

  • contractual covenants from relevant offering participants to provide bring-down representations;
  • questionnaires and certifications;
  • negative consent letters; and
  • periodic re-checking of public databases.

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