SEC Issues Guidance Statement Regarding Waivers of Disqualification under Regulation A and Rules 505 and 506 of Regulation D
The SEC Division of Corporation Finance ("Division") issued a guidance statement clarifying waivers of disqualification under Regulation A and Regulation D Rules 505 and 506.
The guidance explains that disqualification provisions of Securities Act Rules 262 and 505 provide for certain exemptions from registration under Regulation A and Rule 505 of Regulation D. These disqualification provisions are unavailable for an offering if an issuer, any of its predecessors, or any affiliated issuer is subject to certain administrative orders, industry bars, an injunction involving certain securities law violations or specified criminal convictions.
Disqualification can also occur if any of the issuer's directors, officers, general partners, 10 percent beneficial owners of any class of the issuer's equity securities, or promoters, underwriters, persons compensated for soliciting purchasers, or any of the underwriters' or paid solicitors' partners, directors, or officers, is subject to administrative orders, injunctions, associational bars or specified convictions.
The guidance states that in certain circumstances, the SEC may waive Regulation A or Regulation D disqualifications upon a showing of "good cause that it is not necessary under the circumstances that the exemptions be denied." The Division noted that no single factor is "dispositive," and that the burden is on the waiver applicant to show good cause that the exemption waiver should not be denied. The Division explained that therefore the focus of its analysis is on how the identified misconduct bears on the applicant's fitness to participate in these exempt offerings. Furthermore, in making waiver determinations, the Division considers:
- Who was responsible for the misconduct?
- What was the duration of the misconduct?
- What remedial steps have been taken?
- If the waiver is denied, what is the impact?
The Division noted that there are differences in the disqualification provisions of Regulation D Rule 506 and Regulation A 505. Specifically, the Division pointed out that the disqualifying events in Rule 506 are broader than in Rule 505 and the categories of "covered persons" differ.