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SEC Staff Issues New Guidance to Clarify 'Beneficial Owner' in Bad Actor Provision

Tuesday, January 7, 2014
By Yin Wilczek

Jan. 3 --The Securities and Exchange Commission Division of Corporation Finance Jan. 3 issued new guidance to clarify what constitutes a “beneficial owner” for purposes of the bad actor provision in 1933 Securities Act Regulation D Rule 506.

The bad actor provision--Rule 506(d)--was adopted at the same time that the SEC finalized regulations to eliminate its general solicitation prohibition for private placements under Rule 506 and Rule 144A (129 SLD, 7/5/13).

Rule 506(d) provides that an issuer cannot rely on Rule 506 if it or covered persons had certain “disqualifying events,” such as a criminal conviction. Covered persons include “20 percent beneficial owners” of the issuer.

Among other new compliance and disclosure interpretations, Corp Fin said that “beneficial owner” in the bad actor provision is interpreted the same way as under 1934 Exchange Act Rule 13d-3. The phrase “means any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, under Exchange Act Rule 13d-3 has or shares, or is deemed to have or share: (1) voting power, which includes the power to vote, or to direct the voting of, such security; and/or (2) investment power, which includes the power to dispose, or to direct the disposition of, such security.”

Corp Fin also clarified that “beneficial ownership” includes “both direct and indirect interests, determined as under Exchange Act Rule 13d-3.”

Moreover, the division said that an order by a regulator or court pursuant to Rule 506(d)(2)(iii) does not waive the disclosure obligation in Rule 506(e). Rule 506(e) requires issuers to disclose to investors disqualifying events that occurred before Sept. 23, 2013, the effective date of the lifting of the SEC's general solicitation bar.

“Rule 506(d)(2)(iii) permits issuers to rely on the self-executing statement of a regulatory authority to avoid Rule 506 disqualification when that regulatory authority advises the Commission in writing or in its order, decree or judgment, that Rule 506 disqualification should not arise a consequence of a disqualifying event that occurred on or after September 23, 2013,” the division said. “A regulatory authority such as a state securities commission may, however, determine that an order entered before September 23, 2013 would not have triggered disqualification under Rule 506(d)(1) because the violation was not a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct entered within ten years before such sale.”

Earlier Guidance
The new guidance adds to recent C&DIs issued by Corp Fin in early December on the bad actor provision (229 SLD, 11/27/13). Attorneys had asked for the clarifications, observing that “covered persons” will be a challenge to determine.

Meanwhile, Stanley Keller, a partner at Edwards Wildman Palmer LLP, Boston, told Bloomberg BNA that more of such guidance will be forthcoming from the division.

“I expect we will see continued guidance to clarify the new 506 provisions and make them usable, similar to the bad actor guidance just issued,” he said. “The SEC is committed to making the new capital raising opportunities workable consistent with investor protection.”


To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

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