Seed Capital, Rule 504 and the Applicability of Bad Actor Provisions
8 Pages Posted: 9 Feb 2012 Last revised: 20 Mar 2012
Date Written: February 8, 2012
Required by Dodd-Frank, the SEC has proposed rules that would extend bad actor provisions to Rule 506 of Regulation D, the safe harbor for private placements. Currently the provisions apply only to exempt offerings under Regulation A and Rule 505 of Regulation D. In the rule proposal, the SEC asked whether the bad actor provisions should be extended to the safe harbor for seed capital contained in Rule 504 of Regulation D. Extending the bad actor provisions to Rule 504 would help prevent the use of the rule by recidivists. Nonetheless, the Commission should not simply apply the bad actor provisions to the rule in an effort to ensure uniformity. Instead, bad actor provisions included in Rule 504 should be specifically designed to prevent certain types of registration abuses that often implicate the rule. To do so, the Commission should consider expanding the bad actor provisions to include additional categories of persons such as those lawyers and transfer agents that have been sanctioned for certain specified violations of the federal securities laws. Carefully crafted bad actor provisions will likely reduce instances of fraud while leaving unaffected the attributes of Rule 504 that make it attractive to small businesses seeking to raise seed capital.
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