SEC Proposes Rule That Would Ban Bad Actors From Exempt Offerings

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted by Congress in July 2010, includes the requirement that the SEC implement a rule to ban persons who are subject to certain sanctions and disciplinary proceedings or who have been convicted of a felony or misdemeanor related to the purchase or sale of a security from being able to use the securities registration exemption under Rule 506 of Regulation D of the Securities Act of 1933. Regulation D includes three separate exemptions that may be used by issuers of securities to avoid the securities registration requirements. Rule 506 is, by far, the most widely used exemption by issuers under Regulation D. Most private funds, including hedge funds, use the Rule 506 exemption, which is likely the main reason why Congress enacted a law to restrict the use of this exemption.