Bad Actor–Proposed Rules Flowchart

If you are trying to understand the newly proposed SEC rules on bad actors and Rule 506 offerings, you might find the attached flowchart helpful.

As you can see from the flowchart, the proposed rules will add a substantial degree of complexity to Rule 506 offerings that doesn’t presently exist. And the stakes for noncompliance are extreme–there is no Rule 506 exemption available if there is a bad actor, as described in the rules.

Although there is a “reasonable care” exception for noncompliance, meaning that you won’t lose your exemption if you exercised reasonable care, the issuer has to establish that it did not know (the burden of proof is on the issuer), and the issuer has to establish that in the exercise of reasonable care it “could not have known” that a disqualification existed. Plus, the rules go on to state that an issuer will not be able to establish that it exercised reasonable care unless it made “factual inquiry” into whether any disqualifications existed. As the SEC has stated in its proposed rules, “[i]ssuers could potentially devote substantial amounts of time and incur significant costs in making factual inquiries.”

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About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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