SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings

In a 3-2 vote, the Securities and Exchange Commission has agreed to propose a rule (mandated by Congress) that exempts Felons and Bad Actors” from private offerings pursuant to Rule 506 of Regulation D under the 1933 Securities Act. The SEC has also agreed—again in a 3-2 vote—to adopt final rules to set up a whistleblower bounty program.

Under the financial reform legislation’s Section 926, the SEC must bar the sales and offerings of securities by recidivist violators that are subject to certain disciplinary proceedings and sanctions or have a misdemeanor or a felony related to the sale or purchase of a security from being able to avail of the safe harbor act’s Rule 506. The rule lets issuers avoid the reporting requirements of the 1933 Act. It also makes up for approximately 93% of private securities that Reg D. offers.

The proposal would prevent a private placement from taking advantage of the rule if the issuer or individual covered by the rule had a disqualifying event, such as a criminal conviction, restraining order, court injunction, certain commission disciplinary orders, U.S. Postal Service false representation orders, commission “stop orders” to suspend exemptions, suspension or expulsion from membership in a “self-regulatory organization” (or from association with an SRO member), or final orders of insurance, state securities, banking, or credit union regulators. Covered persons include officers, directors, managing members of the issuer, 10-percent beneficial owners, and promoters of the issuer.

SEC Chairman Mary Schapiro has said that the proposal would advance the goal of decreasing the “danger of fraud” in private offerings. She also said that by covering events that took place before Dodd-Frank was enacted, the proposal fulfills the intent of Congress to protect investors from bad actors. She says that to address any concerns, the SEC is seeking comment until July 14.

Regarding the SEC proposal, Shepherd Smith Edwards founder and securities fraud attorney William Shepherd says, “What took you so long?”

Throughout the US, contact our securities fraud attorneys today.

Related Web Resource:
SEC Proposes Rule to Disqualify Felons and Bad Actors From Securities Offerings,, May 25, 2011

1933 Securities Act (PDF)

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