August 23, 2011
Although on its face it seems reasonable to bar convicted felons and other nefarious people from relying upon Rule 506, the bar is more symbolic than effective. Rule 506 is a non-exclusive safe harbor exemption (see Preliminary Note 3 to Regulation D). Thus, if the only deficiency is a bad actor disqualification, the offer and sale nonetheless will be exempt under Section 4(2) of the Securities Act of 1933.
To the extent that the Commission believes that the conditions imposed by Rule 506 enhance investor protection, denying issuers the opportunity to rely on Rule 506 will have the unintended consequence of removing incentives to meet those conditions.
Disqualification, however, will have an impact – disqualified offerings will need to focus on state securities law requirements. Section 102 of the National Securities Markets Improvement Act of 1996 (NSMIA) preempts state qualification requirements with respect to transactions exempt from registration pursuant to Rule 506. Disqualified offerings will therefore not have the benefit of this preemption and issuers will need either to qualify the offer and sale or identify an appropriate exemption in the applicable states (such as California Corporations Code Section 25102(f) which currently imposes no such bar). Thus, a significant consequence of the bar will be to return to the states greater regulatory authority over private placements.
Finally, I oppose any change in the certification requirements with respect to Form D. In proposing Form D, the Commission said that it was intended to serve a data collection purpose: An important purpose of the notice . . . is to collect empirical data which will provide a basis for further action by the Commission either in terms of amending existing rules and regulations or proposing new ones . . . . Further, the proposed Form would allow the Commission to elicit information necessary in assessing the effectiveness of Regulation D as a capital raising device for small businesses."
Over the years, Form D has suffered from "mission creep" and should not be further transmuted without a clear finding by the Commission that the change will promote efficiency, competition, and capital formation. 15 U.S.C. 78c(f)