"Bad Actor" Disqualification From Rule 506 Offerings

On May 27, 2011, the Securities and Exchange Commission, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, released a proposed rule¹ which would disqualify an entity from using the Rule 506 private offering safe harbor if the entity or a "covered person" associated with the entity is or had been involved in a "disqualifying event," specified violations of securities laws or the regulations of securities administrators or certain related entities.

Although currently only a proposed rule, the revisions are significant, as Rule 506 is by far the most widely used SEC-sanctioned securities offering exemption and one of the most cost-efficient ways for small businesses to raise equity capital. For a non-public issuer with a current or future need to raise equity capital in excess of $1,000,000, an inability to use Rule 506 could very well imperil that issuer's future. Additionally, if an offering thought to be exempt under Rule 506 turns out