SEC Issues Guidance on Obtaining Waivers of Disqualification under Regulation A and Rules 505 and 506 of Regulation D | Practical Law

SEC Issues Guidance on Obtaining Waivers of Disqualification under Regulation A and Rules 505 and 506 of Regulation D | Practical Law

The SEC issued guidance on obtaining waivers of disqualification under Regulation A and Rules 505 and 506 of Regulation D.

SEC Issues Guidance on Obtaining Waivers of Disqualification under Regulation A and Rules 505 and 506 of Regulation D

by Practical Law Corporate & Securities
Published on 16 Mar 2015 • USA (National/Federal)
The SEC issued guidance on obtaining waivers of disqualification under Regulation A and Rules 505 and 506 of Regulation D.
On March 13, 2015, the SEC issued guidance on obtaining waivers of disqualification under Regulation A and Rules 505 and 506 of Regulation D. A waiver of disqualification from the exemptions from registration available under these provisions, which could include conditions or limitations, may be granted by the SEC's Division of Corporation Finance (Division) if a review of all the facts and circumstances leads the Division to determine that the waiver applicant has met its burden of showing good cause that it is not necessary under the circumstances that the exemptions be denied. The guidance states that the Division will consider, among other facts and circumstances, the following factors when evaluating a request for a waiver:
  • The nature of the violation or conviction.
  • Whether the violation or conviction involved the offer and sale of securities.
  • Whether the conduct involved a criminal conviction or scienter-based violation, as opposed to a civil or administrative non-scienter based violation. In the case of a criminal conviction or a scienter-based violation involving the offer and sale of securities, the burden on the party seeking the waiver would be significantly higher.
The Division will also consider the following factors:
  • The party responsible for the misconduct. The Division will consider who was responsible for the misconduct and what role the bad actor or actors have or had regarding the party seeking the waiver. For example, the Division would consider it a negative factor if:
    • the party seeking the waiver is the same as the party responsible for the misconduct; or
    • an individual, such as an executive officer, director or control person, committed the misconduct and that individual continues to exert influence on the operations of the entity seeking the waiver.
    The Division will also consider whether the misconduct reflects more broadly on the entity as a whole. For example:
    • if warning signs were disregarded or the tone at the top of the party seeking the waiver condoned, encouraged or did not address the misconduct, or actions or omissions by the party seeking the waiver (or any if its affiliates) obstructed the regulatory or law enforcement investigation, these factors would weigh against granting a waiver; and
    • depending on the circumstances and conduct at issue, if the misconduct committed by one or more individuals resulted in the waiver applicant's disqualification, and the applicant removes or terminates its association with those individuals, the Division would generally view this as favorable to the waiver request.
  • Duration of the misconduct. The Division will consider whether the misconduct occurred over an extended period or whether it was an isolated instance. If it was an isolated instance, this factor would weigh favorably in the waiver determination. If the misconduct occurred over an extended period, this factor would weigh negatively in the waiver determination.
  • Remedial steps taken. The Division will consider:
    • what remedial measures the party seeking the waiver has taken to address the misconduct;
    • when those remedial actions began; and
    • whether those measures are likely to prevent a recurrence of the misconduct and mitigate the possibility of future violations.
    The Division will look at whether:
    • there were changes in the control of the party seeking the waiver;
    • the personnel involved in the misconduct remain employed by the party seeking the waiver;
    • the party seeking the waiver has taken steps to improve training; or
    • the party seeking the waiver has made improvements to its policies, procedures or practices.
    The analysis of the importance of the remedial steps will focus on how they relate to the party's ability to prevent future misconduct and harm to investors, clients or customers. Depending on the circumstances, the remedial steps undertaken by the party may support a conclusion that, despite the past violation, the party would be less likely to engage in future misconduct. However, if the conduct in question or similar conduct has occurred on prior occasions, this may support a conclusion that the party would be more likely to engage in future misconduct.
  • 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 not granted; and
    • weigh any impact against the facts and circumstances relating to the misconduct to assess whether disqualification would be a disproportionate hardship in the light of the parties involved in, and the nature of, the misconduct.
    Applicants should:
    • submit information on 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.
No single factor is dispositive for the Division when evaluating a waiver request, and the burden is on the waiver applicant to show good cause that it is not necessary under the circumstances that the exemptions be denied.
Parties seeking a waiver must submit a waiver request that includes appropriate justification, addressing the factors set out in the guidance, describing why a waiver should be granted. The Division will continue to ask, where appropriate, that the recipient of a waiver provide disclosure about the disqualifying event to investors a reasonable time before future sales occur in offerings made under Regulation A or Rules 505 or 506 of Regulation D.