SEC Proposal Would Prohibit Reliance on Reg D by Bad Actors
The SEC has proposed a new rule that would prohibit certain “bad actors” from relying on Regulation D’s private placement exemption. The proposed rule would cover funds but would not cover investment advisers to funds. The proposed rule applies to an issuer, its affiliates, predecessors, and control persons. It also applies to solicitors for such issuers. Disqualifying events include securities-related criminal convictions, court orders, administrative actions, SRO discipline, and state regulatory actions. An issuer can avoid disqualification either through an exemptive process or by exercising reasonable care and due diligence to determine if a disqualifying event exists. The SEC seeks comment on whether the rule should apply to investment advisers to private funds.
OUR TAKE: If adopted as proposed, firms will have to add a layer of due diligence including D&O Questionnaires, background searches, and solicitor agreement representations to utilize the reasonable care defense.