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Friday the 13th: The SEC Edition

March 24, 2015

Like a good horror movie, the specter of SEC administrative bars haunts anyone subject to an enforcement action. It was therefore fitting that the SEC’s Division of Corporation Finance should issue a policy statement on waivers — on Friday the 13th. The quietly issued policy statement specifically addresses the waiver of the automatic disqualification provisions under Regulation A and Rules 505 and 506 of Regulation D. View the Policy Statement

The disqualification provisions of Rules 262, 505, and 506 under the Securities Act make the exemptions from registration under Regulation A and Rule 505 of Regulation D unavailable for an offering if an issuer, its affiliates, or certain persons is subject to certain administrative orders, industry bars, injunctions, or specified criminal convictions.

The Commission may waive a disqualification upon a showing of good cause that it is not necessary under the circumstances that the exemptions be denied. The Commission has delegated authority to grant these waivers to the Director of the Division of Corporation Finance, although the Commission retains authority to consider waiver requests and review actions taken pursuant to the delegated authority.

When considering an application for a waiver, the Division will consider the nature of the violation or conviction and whether it involved the offer and sale of securities. In addition, the Division will consider whether the conduct involved a criminal conviction or scienter based violation. 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 will be significantly greater.

The Division emphasized that the provisions from which the waiver applicant is disqualified are safe harbors that facilitate private or limited offerings of securities and investors in such offerings do not receive the benefits of the registration requirements of the Securities Act. Therefore, the focus of the Division’s waiver analysis will be on how the identified misconduct bears on the applicant’s fitness to participate in these exempt offerings.

The Division also will consider the following factors, none of which is dispositive.

  • Who was responsible for the misconduct and his or her relationship with the waiver applicant. The Division will also consider whether the misconduct reflects more broadly on the entity as a whole. Removal or termination of those responsible for the misconduct will generally be viewed favorably.
  • The duration of the misconduct. An isolated event will be treated more favorably than that which occurred over an extended period.
  • Remedial measures. The Division will consider what remedial measures the waiver applicant has taken, when those remedial measures began, and whether those measures are likely to prevent a recurrence of the misconduct and mitigate the possibility of future violations.
  • The impact if the waiver is denied. The Division will consider the severity of the impact on the issuer or third parties, such as investors, clients or customers, if the waiver request is denied. Applicants should submit information concerning whether or how often they have used the relevant exemption in the past, or how they plan to use the exemption in the future, and explain why a waiver is needed.

Parties seeking a waiver must submit a waiver request that includes appropriate justification, addressing the factors outlined above, describing why a waiver should be granted.

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