The North American Securities Administrators Association (NASAA) has urged the SEC to resist calls from the securities industry to water down proposed rule amendments that would disqualify certain felons and other “bad actors from offering securities exempt from securities registration under Rule 506 of Regulation D. In a comment letter to the SEC on July 25, 2011, NASAA asked the SEC to reject suggestions to grandfather any pre-existing disqualifying events or otherwise delay the implementation of the disqualifications of bad actors mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act).
NASAA rejected the contention that the proposed rule would have a potentially retroactive effect, noting that the rules would only disqualify offers and sales made under Rule 506 that occur after the rule’s effective date. Moreover, grandfathering disqualifying events or delaying implementation of the bad actor prohibitions would be contrary to the mandate given to the SEC by Congress to implement the disqualification provisions by the first anniversary of the Act’s passage, NASAA stated.
NASAA also strongly supported the SEC’s proposal to apply the disqualification provisions to each sale of securities made after the rule amendments become effective. If the date for determining whether an offer is disqualified is moved to the date of the first sale or the first offer, NASAA argued, bad actors would be allowed to continue offering and selling securities in exempt offerings even after a disqualifying event. Such an outcome would be clearly detrimental to investor protection, NASAA wrote.
Among its other comments, NASAA encouraged the SEC to adopt uniform disqualification provisions for all exempt offerings conducted under Regulations A, D, and E. NASAA agreed with the Commission that the existence of different disqualification standards will create confusion for investors, who will not understand the differences, and increase compliance costs for issuers. Moreover, inconsistent disqualification provisions will encourage issuers conducting securities offerings involving recidivists to rely on exemptions with the least restrictive provisions, especially Rule 504 which is currently not subject to any disqualification provisions.