The SEC today proposed a rule to deny certain securities offerings from qualifying for exemption from registration if they involve certain “felons and other bad actors.”  The rule is mandated by the Dodd-Frank Reform Act.  The SEC is accepting public comments through 7/14/11.

Regulation D provides 3 exemptions that a company can use to avoid registration under the securities laws, the most widely used of which is Rule 506.  If such offering qualifies for the Rule 506 exemption, an issuer can raise unlimited capital from an unlimited number of accredited investors and up to 35 non-accredited investors.  As proposed, an offering would be unable to rely on the Rule 506 exemption if the issuer or any other person covered by the rule had a “disqualifying event,” such as a criminal conviction, court injunction and restraining order.

    Rule Proposal Summary.   The SEC proposes to adopt rules that disqualify securities offerings involving certain “felons and other ‘bad actors’” from reliance on the safe harbor from Securities Act registration provided by Rule 506 of Regulation D.  The rules must be “substantially similar” to Rule 262, the disqualification provisions of Regulation A under the Securities Act, and must also cover matters enumerated in Section 926 - including certain state regulatory orders and bars. 

For further details, go to:  

• [SEC PR 11-115, 5/25/11, Announcement]   and  
  
• [SEC Proposed Rule Release 33-9211, 5/25/11, "Disqualification of Felons and Other .."]