The Securities and Exchange Commission recently published a policy statement that describes its “bad actor” waiver process. As you recall, if there is a bad actor involved in your deal, you may not use certain exemptions from registration, including Rule 506 of Regulation D.
It will consider the following factors, including:
- who was responsible for the misconduct;
- what was the duration of the misconduct;
- what remedial steps have been taken; and
- the impact on the issuer or third parties (investors, clients) if the waiver is denied.
No single factor is dispositive, and the burden is on the waiver applicant to show good cause that it is not necessary under the circumstances that the exemptions be denied. Where there is a criminal conviction or a scienter based violation involving the offer and sale of securities, the burden on the party seeking the waiver to show good cause that a waiver is justified would be significantly greater.