Bad Actor Rule

Under the final disqualification rule, an issuer cannot rely on Rule 506 exemption if the issuer or any other person covered by the rule had a "disqualifying event."

Covered Persons

The final disqualification rule covers the issuer, including its predecessors and affiliated issuers, as well as:

(1) Directors and certain officers, general partners, and managing members of the issuer.

(2) 20 percent beneficial owners of the issuer.

(3) Promoters.

(4) Investment managers and principals of pooled investment funds.

(5) Persons compensated for soliciting investors as well as the general partners, directors, officers, and managing members of any compensated solicitor.

Disqualifying Events:

Under the final rule, effective July 10, 2013, a "disqualifying event" includes:

(1) Criminal convictions in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries. The criminal conviction must have occurred within 10 years of the proposed sale of securities (or five years in the case of the issuer and its predecessors and affiliated issuers).

(2) Court injunctions and restraining orders in connection with the purchase or sale of a security, making of a false filing with the SEC, or arising out of the conduct of certain types of financial intermediaries. The injunction or restraining order must have occurred within five years of the proposed sale of securities.

(3) Final orders from the Commodity Futures Trading Commission, federal banking agencies, the National Credit Union Administration, or state regulators of securities, insurance, banking, savings associations, or credit unions that …

Bar the issuer from associating with a regulated entity, engaging in the business of securities insurance or banking, or engaging in savings association or credit union activities, or…

Are based on fraudulent, manipulative, or deceptive conduct and are issued within 10 years of the proposed sale of securities.

(4) Certain SEC disciplinary orders relating to brokers, dealers, municipal securities dealers, investment companies, and investment advisers and their associated persons.

(5) SEC cease-and-desist orders related to violations of certain anti-fraud provisions and registration requirements of the federal securities laws.

(6) SEC stop orders and orders suspending the Regulation A exemption issued within five years of the proposed sale of securities.

(7) Suspension or expulsion from membership in a self-regulatory organization (SRO) or from association with an SRO member.

(8) U.S. Postal Service false representation orders issued within five years before the proposed sale of securities.

Disqualification applies only for disqualifying events that occur after the effective date of this rule. But matters that existed before the effective date of the rule and would otherwise be disqualifying are subject to a mandatory disclosure requirement to investors.

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