This CD&I suggests that marketing personnel of the general partner, managing member, or investment manager of a private fund may be “covered persons” for purposes of Rule 506(d).
Disclosure of Past Disqualifying Events of Solicitor
Issuers must provide all prospective investors with the disclosure required under Rule 506(e) (typically, disclosure of “bad acts” occurring prior to September 23, 2013) for all placement agents and other compensated solicitors (and their respective covered control persons) who are involved with the offering at the time of any sale to such persons, regardless of whether or not such placement agents and other compensated solicitors actually sold interests to the prospective investors to whom disclosure is required to be made. In an offering in which the issuer uses multiple placement agents or other compensated solicitors, if disclosure under Rule 506(e) is required with respect to one or more of those agents or solicitors (or their respective covered control persons), the issuer may not selectively provide Rule 506(e) disclosure only to those investors who were solicited by the specific agents or solicitors that triggered the disclosure requirement. (CD&I 260.26.)
It would seem that one could plausibly read Rules 506(d) and 506(e) as only requiring disclosure of any disqualifying event with respect to a placement agent or other compensated solicitor and its covered control persons only to the investors actually solicited by such agent or solicitor in light of: (1) the language of Rule 506(d), which mandates the loss of the exemption from the registration requirements of Securities Act under Rule 506 for a “sale” of securities if any solicitor has been or will be paid in connection “with such sale of securities” (rather than “with the offering of such securities”) and (2) the potential that disclosure regarding all compensated solicitors in an offering could confuse and mislead investors who have only been solicited by specific solicitors. However, the staff of the SEC’s Division of Corporation Finance has taken a different interpretive position in this CD&I.
“Affiliated issuer” does not include every affiliate of the issuer that has issued securities. Instead, for purposes of Rule 506(d), an “affiliated issuer” of the issuer is an affiliate (as defined in Rule 501(b) of Regulation D) of the issuer that is issuing securities in the same offering, including offerings subject to integration pursuant to Rule 502(a) of Regulation D. (CD&I 260.16.)
Foreign Disqualifying Events
Disqualification under Rule 506(d) would not be triggered by actions taken in jurisdictions other than the United States. This includes convictions, court orders or injunctions in a non-U.S. court, or regulatory orders issued by non-U.S. regulatory authorities. (CD&I 260.20.)
Reasonable Care Exception
Rule 506(d)(2)(iv) provides a reasonable care exception if the issuer can establish that it did not know and, despite the exercise of reasonable care, could not have known that a disqualification existed under Rule 506(d)(1). The SEC’s guidance explains that this may occur when, despite the exercise of reasonable care, (1) the issuer was unable to determine the existence of a disqualifying event; (2) was unable to determine that a particular person was a covered person; or (3) initially reasonably determined that the person was not a covered person, but subsequently learned that determination was incorrect. If an issuer discovers a Rule 506(d) disqualifying event or covered person during the course of an ongoing offering of securities in reliance on the safe harbor provided under Rule 506, it must then consider what steps would be appropriate to continue permissibly relying on Rule 506. An issuer may need to seek waivers of disqualification from the SEC, terminate the relationship with the applicable covered persons, provide disclosure to investors in accordance with Rule 506(e), or take other remedial steps to address such Rule 506(d) disqualification. (CD&I 260.23.)
Waiver of Obligation to Disclose Past Events
The Rule 506(e) disclosure obligation for past events that would have been disqualifying, except that they occurred before September 23, 2013 (the effective date of Rule 506(d)), is not subject to waiver by the SEC. (CD&I 260.24.)
Accordingly, issuers should not attempt to seek such waiver of disclosure from the SEC.