Comments on Proposed Rules
In general, commenters did not oppose the proposed amendments to
Regulation A’s bad actor disqualification rules. Some commenters expressly supported the proposed rules.746 Some commenters, however, recommended changes to particular
745 Rel. No. 33-9414 (July 10, 2013) [78 FR 44729]. The Commission proposed rules substantially similar to those adopted pursuant to Section 926 of the Dodd-Frank Act in the Proposing Release for securities-based crowdfunding transactions under Title III of the JOBS Act. See Rel. No. 33- 9470, at 284.
746 See, e.g., KVCF Letter; MCS Letter;
provisions of the proposal. One commenter recommended revising the look-back periods for disqualifying events to run from the time of sale, not from the time of filing of the offering statement as proposed.747 Another commenter recommended adding final orders
of Canadian provincial regulators to the list of disqualifying events.748 This commenter
noted that some Canadian provinces have information publicly posted on their websites that would facilitate the bad actor diligence process. One commenter recommended that the Commission develop an online bad actor database.749 Another commenter supported bad actor provisions as extensive as those under Rule 506(d).750 Finally, one commenter recommended defining voting equity securities for purposes of the bad actor disqualifications provisions using the definition in Rule 12b-2 of the Exchange Act.751
Final Rules
We are adopting bad actor disqualification provisions for Regulation A, substantially as proposed with the exception of one change to further align the final rules for Regulation A with similar provisions in Rule 506(d). The covered persons and triggering events in the final rules for Regulation A are substantially the same as the covered persons and triggering events included in Rule 506(d).752 The covered persons include managing members of limited liability companies; compensated solicitors of investors; underwriters; executive officers and other officers participating in the offering;
747 KVCF Letter.
748 Karr Tuttle Letter.
749 Ladd Letter 2.
750 MCS Letter.
751 ABA BLS Letter (suggesting “voting securities” be deemed securities the holders of which are presently entitled to vote for the election of directors (or the equivalent)).
752 17 CFR 230.506(d).
and beneficial owners of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power.753 Consistent with the bad actor disqualification rules under Rule 506(d), the final rules also include two new disqualification triggers not previously present in Regulation A: (1) final orders and bars of certain state and other federal regulators,754 and (2) Commission cease-and-desist orders relating to violations of scienter-based anti-fraud provisions of the federal securities laws or Section 5 of the
Securities Act.755 In order to clarify the scope of the term “final order” as it appears in Rule 262, we are including a definition of that term in Regulation A that is consistent with the term as it appears in Rule 501(g) of Regulation D. As adopted, a “final order” shall mean a written directive or declaratory statement issued by a federal or state agency described in Rule 262(a)(3) under applicable statutory authority that provides for notice and an opportunity for hearing, which constitutes a final disposition or action by that federal or state agency.756 We believe that creating a uniform set of bad actor triggering events should simplify due diligence, particularly for issuers that may engage in different types of exempt offerings. For this reason, consistent with the disqualification provisions of Rule 506(d), the final rules do not include final orders of Canadian provincial regulators in the list of disqualifying events.
The final disqualification rules in Regulation A also specify that an order must bar the covered person at the time of filing of the offering statement, as opposed to the requirement in Rule 506(d) that the order must bar the covered person at the time of the
753 Rule 262(a).
754 Rule 262(a)(3).
755 Rule 262(a)(5).
756 Rule 261(d).
relevant sale.757 This clarification accords with the current provisions of Rule 262 and is appropriate for Regulation A because there is no filing requirement before the time of first sale in Rule 506.758 We are further adopting a reasonable care exception to the disqualification provisions on a basis consistent with Rule 506(d).759 Under the final
rules, an issuer will not lose the benefit of the Regulation A exemption if it is able to show that it did not know, and in the exercise of reasonable care could not have known, of the existence of a disqualification.760 As proposed, and consistent with the provisions of existing Regulation A, the final rules permit issuers that are disqualified from relying on the exemption to request a waiver of disqualification from the Commission.761
In the Proposing Release, we solicited comment on the interpretation of the phrase “voting equity securities,” as it appears in “any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power,” a category of covered persons in Rule 506(d) and proposed Rule 262 as well as our proposed rules for securities-based crowdfunding transactions. Consistent with the
views of at least one commenter,762 we have reconsidered our initial views on the
interpretation of “voting equity securities.” We believe that it is appropriate to refine our initial interpretation,763 as it applies to our bad actor disqualification rules,764 and create
757 Rule 506(d), 17 CFR 230.506(d).
758 Under Rule 503 of Regulation D, issuers must file a notice of sales on Form D no later than 15 calendar days after the first sale of securities. 17 CFR 230.503(a).
759 See Rule 262(b)(4).
760 Id.
761 Rule 262(b)(2).
762 ABA BLS Letter.
763 When we adopted Rule 506(d), we did not define “voting equity securities,” but rather indicated that our initial intention would be to consider securities as voting equity securities if “securityholders have or share the ability, either currently or on a contingent basis, to control or
a “bright-line” standard that is consistent with the definition of the term “voting securities” in Rule 405 of the Securities Act.765 In this regard, we believe that such a term should include only those voting equity securities which, by their terms, currently entitle the holder to vote for the election of directors. In other words, we believe the term should be read to denote securities having a right to vote that are presently exercisable.
Additionally, while the ability to control or significantly influence the management or policies of the issuer may be derived in part from the power to vote for the election of directors, in order to dispel any uncertainty as to the scope of our interpretation, we believe the term “voting equity securities” should be interpreted based on the present right to vote for the election of directors, irrespective of the existence of control or significant influence.
Under the final rules, offerings that would have been disqualified from reliance on Regulation A under Rule 262 as in effect before today’s amendments will continue to be disqualified. Triggering events that were not previously included in the bad actor rules for Regulation A and that pre-date effectiveness of the final rules will not cause disqualification, but instead must be disclosed on a basis consistent with Rule 506(e).
Specifically, issuers will be required to indicate in Part I of Form 1-A that none of the persons described in Rule 262 are disqualified and, where applicable, that disclosure of
significantly influence the management and policies of the issuer through the exercise of a voting right.” See SEC Rel. No. 33-9414 (July 10, 2013) [78 FR 44729], text accompanying fn. 62. In light of concerns that our initial interpretation may be overbroad and that a “bright line” test may be more workable and would facilitate compliance, as we indicated in the Proposing Release, we are reconsidering our initial views. See Proposing Release, at Section II.G.
764 In addition to Regulation A, this interpretive position would apply to Rule 505 and Rule 506 of Regulation D.
765 In Securities Act Rule 405, the term voting securities means securities the holders of which are presently entitled to vote for the election of directors. 17 CFR 230.405.
triggering events that would have triggered disqualification, but occurred before the effective date of the Regulation A amendments, will be provided in Part II of
Form 1-A.766
We believe that the final rules are appropriate in light of the Section 3(b)(2)(G)(ii) mandate, the benefits of creating a more uniform set of standards for all exemptions that include bad actor disqualification, and the required disclosure in the offering circular of persons subject to events that would have triggered disqualification, but occurred before the effective date of the final rules.
Relationship with State Securities Law