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Title: 2007 FRONTIERS IN HEDGE FUNDS AND PROPRIETARY TRADING FORUM TARGETING HEDGE FUNDS: NEW ANTIFRAUD RUL


1
2007 FRONTIERS IN HEDGE FUNDS AND PROPRIETARY
TRADING FORUMTARGETING HEDGE FUNDSNEW
ANTI-FRAUD RULEAND TOUGHER ACCREDITED INVESTOR
STANDARDSRichard P. BourgeoisPartner,
Fulbright Jaworski L.L.P.
2
TARGETING HEDGE FUNDS
  • NEW ANTI-FRAUD RULE
  • AND
  • TOUGHER ACCREDITED
  • INVESTOR STANDARDS

3
INTRODUCTION
  • In Goldstein v. SEC, the D.C. Court of Appeals
    thwarted the SECs attempt to bring hedge funds
    under its regulation by vacating the SECs hedge
    fund adviser registration rule, which would have
    required advisers to look through their funds to
    count the number of limited partners in
    determining whether they needed to be
    SEC-registered. But the court held that an
    investment advisers clients are the funds, not
    the limited partners in the funds, and the SECs
    reading to the contrary was arbitrary and not
    justified by the statute or legislative history.
  • The court also ruled that for purposes of the
    general anti-fraud provisions of the Advisers Act
    the clients are the investment pools themselves,
    not the individual investors in such pools. This
    holding created uncertainty as to whether the SEC
    could bring actions against an adviser for
    defrauding investors in a pool.
  • The SEC has now struck back. New Rule 206(4)-8
    and the other proposals well discuss today are
    the SECs response.

4
NEW ANTI-FRAUD RULE ADOPTED.NEW ACCREDITED
INVESTOR STANDARDS PROPOSED.
  • On December 27, 2006, the SEC proposed two new
    rules under the Investment Advisers Act of 1940
    (the Advisers Act) aimed at protecting
    investors in pooled investment vehicles such as
    hedge funds and private equity funds. The first,
    Rule 206(4)-8, is a broad anti-fraud rule
    targeted at advisers to pooled investment
    vehicles.
  • On August 9, 2007, the SEC adopted Rule 206(4)-8
    as originally proposed,2 effective as of
    September 10, 2007.
  • The second rule proposal would have required
    natural persons investing in hedge funds and
    private equity funds to have 2.5 million in
    investments.1 In the face of a hostile reaction,
    the SEC has not adopted the proposed accredited
    investor rule.
  • Instead, the SEC proposed new changes to
    Regulation D, the private offering exemption most
    commonly used by to offer interests in private
    investment funds, including a new definition for
    large accredited investors.3 The comment
    period for these proposals ended October 9, 2007.
  • 1 See Prohibition of Fraud by Advisers to Certain
    Pooled Investment Vehicles, SEC Release No.
    IA-2628 (Aug. 3, 2007), available at
    www.sec.gov/rules/final/2007/ia-2628.pdf .
  • 2 See Prohibition of Fraud by Advisers to Certain
    Pooled Investment Vehicles Accredited Investors
    in Certain Private Investment Vehicles,
    Securities Act Release No. 8766 (Dec. 27, 2006),
    available at www.sec.gov/rules/proposed/2006/33-8
    766.pdf.
  • 3 See Revisions of Limited Offering Exemptions in
    Regulation D, Securities Act Release No. 8828
    (Aug. 3, 2007), available at www.sec.gov/rules/pro
    posed/2007/33-8828.pdf.

5
NEW ANTI-FRAUD RULE
  • RULE 206(4)-8
  • PROHIBITION OF FRAUD BY ADVISERS TO CERTAIN
    POOLEDINVESTMENT VEHICLES
  • Under the new Rule, it will constitute a
    fraudulent, deceptive, or manipulative act,
    practice, or course of business for any
    investment adviser to a pooled investment vehicle
    to
  • Make any untrue statement of a material fact or
    omit to state a material fact necessary to make
    the statements made, in light of the
    circumstances under which they were made, not
    misleading, to any investor or prospective
    investor in the pooled investment vehicle or
  • Otherwise engage in any act, practice, or course
    of business that is fraudulent, deceptive, or
    manipulative with respect to any investor or
    prospective investor in the pooled investment
    vehicle.
  • According to the SEC, the principal benefit of
    the Rule is that it clearly enables the SEC to
    bring enforcement actions under the Advisers Act
    if an adviser to a pooled investment vehicle
    disseminates false or misleading information to
    investors or prospective investors or otherwise
    commits fraud with respect to any investor or
    prospective investor.

6
WHO IS COVERED DEFINITIONS
  • Pooled investment vehicle means any investment
    company as defined in Section 3(a) of the
    Investment Company Act of 1940 (the Company
    Act), or any company that would be an investment
    company under 3(a) of the act but for the
    exclusion provided from that definition by either
    Section 3(c)(1) (100 or fewer beneficial owners)
    or Section 3(c)(7) (all owners are qualified
    purchasers) of the Company Act.
  • A material fact in this context, as in the U.S.
    securities laws generally, means one where there
    is a substantial likelihood that a reasonable
    investor in making an investment decision would
    consider it as having significantly altered the
    total mix of information available.

7
SIX (6) SIGNIFICANT ASPECTS OF THE RULE
  • Applies uniformly to
  • All 3(c)(1) funds and 3(c)(7) funds, regardless
    of lock-up periods, including
  • hedge funds
  • private equity funds
  • venture capital funds
  • buyout funds
  • CDO funds, and
  • other types of privately offered pools that
    invest in securities, and
  • all mutual funds and other registered investment
    companies.
  • The Rule does not apply to a pooled investment
    vehicle that is excluded from the definition of
    investment company other than by virtue of
    Section 3(c)(1) or 3(c)(7) of the Company Act,
    such as real estate investment trusts, bank
    common trust and collective trust funds, business
    development companies, or most issuers of
    asset-backed securities

8
SIX (6) SIGNIFICANT ASPECTS OF THE RULE (cont.)
  • 2. Applies to both existing and prospective
    investors.
  • SEC rejected the notion that the Rule should not
    prohibit fraud against prospective investors on
    the argument that such fraud does not actually
    harm investors until they, in fact, make an
    investment.
  • Rather, in the opinion of the SEC, false or
    misleading statements and other frauds by
    advisers are no less objectionable when made in
    an attempt to draw in new investors than when
    made to existing investors.
  • 3. Applies to both registered and unregistered
    advisers.
  • SEC Many of our enforcement cases against
    advisers to pooled investment vehicles have been
    brought against advisers that are not registered
    under the Advisers Act, and we believe that it is
    critical that we continue to be in a position to
    bring actions against unregistered advisers that
    manage pools and that defraud investors in those
    pools.
  • The new Rule applies to both U.S. advisers and to
    offshore investment advisers that advise funds
    with U.S. clients.

9
SIX (6) SIGNIFICANT ASPECTS OF THE RULE (cont.)
  • 4. Not limited to offers, sales and redemptions
    of securities Covers all communications
  • SEC enforcement could occur even if a prospective
    investor never actually invests.
  • Not limited to private offering memoranda or
    offering circulars.
  • Also includes statements made in
  • account statements
  • responses to RFPs
  • electronic solicitations
  • personal meetings through capital introduction
    services
  • investor letters, quarterly and annual financial
    statements and periodic performance reports
  • statements made at annual meetings
  • capital call notices

10
SIX (6) SIGNIFICANT ASPECTS OF THE RULE (cont.)
  • 5. Covers both untrue statements and deceptive
    conduct. For example
  • New Rule 206(4)-8 would cover materially false or
    misleading statements regarding
  • investment strategies the pooled investment
    vehicle will pursue
  • the experience and credentials of the adviser or
    its associated persons
  • the risks associated with an investment in the
    pool
  • the performance of the pool or other funds
    advised by the adviser
  • the valuation of the pool or investor accounts in
    it
  • practices the adviser follows in the operation of
    its advisory business such as how the adviser
    picks brokers or allocates investment
    opportunities (for example, taking advantage of
    an opportunity that should have been given to the
    fund)
  • use of side letters without disclosing their
    existence to other investors, where such use or
    failure to disclose would be fraudulent,
    deceptive or manipulative.

11
SIX (6) SIGNIFICANT ASPECTS OF THE RULE (cont.)
  • 5. Covers both untrue statements and deceptive
    conduct. For example (cont.)
  • Unlike Rule 10b-5, Rule 206(4) covers deceptive
    conduct, which could include
  • Taking in investor money without investing it.
  • Distributing inaccurate financial statements
  • Improper allocation of investment opportunities
  • Improper valuation
  • Directing brokerage to finders
  • Failure to follow compliance policies and
    procedures
  • Any business practice that harms investors

12
SIX (6) SIGNIFICANT ASPECTS OF THE RULE (cont.)
  • 6. Negligent conduct may constitute fraud. No
    scienter required.
  • Scienter means that a person know an act was
    wrongful before doing it.
  • Instead, Rule 206(4)-8 is intended to reach
    conduct that is negligently deceptive as well as
    conduct that is recklessly or deliberately
    deceptive.
  • Arguably the most controversial aspect of the new
    Rule.
  • Commissioner Paul Atkins dissented from the SECs
    position that Rule 206(4)-8 does not require a
    showing of intent, saying
  • Interpreting the broad prohibitions contained in
    Rule 206(4)-8 not to require intent essentially
    redefines the elements of fraud.
  • The new negligence standard combined with the
    breadth of the statutes effectively places the
    responsibility of defining violations of the new
    Rule with the Division of Enforcement, rather
    than with the SEC generally, as Congress intended.

13
HOW RULE 206(4)-8 IS ENFORCED
  • The SEC will enforce the new Rule through civil
    and administrative proceedings
  • Through enforcement actions under the new Rule,
    the SEC is able to
  • Stop ongoing frauds through cease and desist
    orders
  • Bar persons that have committed certain specified
    violations or offenses from being associated with
    an investment adviser
  • Impose civil penalties
  • Seek court orders to protect fund assets
  • Order disgorgement
  • Does not provide for a private cause of action

14
So What Does it All Mean?Has Anything Really
Changed?
  • In the open meeting adopting the Rule, the
    Commissioners opined that the new Rule imposes no
    new obligations on advisers, whether registered
    or not, especially given the many pre-existing
    anti-fraud rules.
  • Given the Commissioners view, it is perhaps not
    surprising that, when asked, SEC staff members
    were unable to provide an example of misconduct
    that would be actionable under the new Rule but
    not under any pre-existing law or regulation
  • This is perhaps disingenuous given that
  • No intent to defraud is necessary
  • Enforcement can take place even in the absence of
    an investment
  • The SEC enforcement staff now defines what is a
    violation.

15
So What Does it All Mean?Has Anything Really
Changed? (cont.)
  • At a minimum, advisers who are subject to the
    Rule should
  • Review offering documents and other investor
    communications (especially performance
    information).
  • Is puffery allowed?
  • Is it misleading to say performance is up this
    quarter without mentioning that it was down last
    quarter?
  • Review Compliance Procedures and Code of Ethics.
    Consider
  • Adopting express policies detailing document
    retention, review of documents and client
    correspondence, and education of professionals
    and staff regarding the anti-fraud rules.
  • Revising procedures relating to investor
    communications, to assure that all such
    communications are complete and accurate.

16
PROPOSEDNEWACCREDITED INVESTOR STANDARDS
  • Background Regulation D
  • Regulation D, adopted in 1982, is the principal
    exemption used by funds to offer their securities
    without having to register under the Securities
    Act of 1933. Most funds rely on Rule 506 under
    Regulation D.
  • Rule 506 is a safe harbor under Section 4(2) of
    the Securities Act
  • Rule 506 provides an exemption without any limit
    on the offering amount, so long as offers are
  • made without general solicitation or advertising
    , and
  • only to "accredited investors" and a limited
    number of non-accredited investors who satisfy an
    investment sophistication standard.
  • Individual investors must meet a 1.0 million
    joint net worth test or a 200,000 annual income
    test (or 300,000 with spouse)
  • As a result, almost 8.5 of American households
    now qualify for accredited investor status,
    versus only 1.87 in 1982.

17
PROPOSEDNEWACCREDITED INVESTOR STANDARDS
  • December 2006 SEC Proposal to Modify Accredited
    Investor Standard
  • In 2006, the SEC proposed a new definition of
    accredited natural person targeted especially
    at hedge funds and private equity funds that
    would have severely limited marketing for many
    hedge funds.
  • Under the proposal, any natural person
    investing in a 3(c)(1) fund or a 3(c)(7) fund
    (other than, in general, a venture capital fund)
    would have to
  • Be an accredited investor under existing
    Regulation D
  • Own at least 2.5 million in investments (to be
    adjusted for inflation), excluding real estate
    not held for investment and, unless the spouse is
    investing too, 50 of a spouses investments.
  • No doubt because of the heavy negative response
    to this proposal, the SEC has yet to take action
    on it, even though it was proposed jointly with
    the new anti-fraud rule. The SEC has requested
    additional comments and the status of the
    proposed rule remains unclear.

18
Proposed Revisions to Regulation D
  • Apparently abandoning for the time being the
    December 2006 accredited natural person test,
    the SEC, in August 2007, proposed to revise
    Regulation D. The proposal would make changes in
    four principal areas involving Regulation D
  • Add new Rule 507, permitting unlimited sales to
    large accredited investors and permitting
    limited advertising.
  • Various amendments to the current definition of
    accredited investor, including a category for
    natural persons owing 750,000 in
    investments.
  • Shorten the safe harbor period under Regulation
    D from 6 months to 90 days.
  • Provide uniform disqualification provisions for
    all Regulation D offerings.

19
New Rule 507Exemption for Offers and Sales to
Large Accredited Investors
  • Large accredited investors would consist of the
    same categories of entities and individuals that
    qualify for accredited investor status under
    existing Rule 506, but with significantly higher
    dollar-amount thresholds for investors subject to
    such thresholds.
  • Legal entities now considered accredited
    investors if their assets exceed 5 million would
    be required to have 10 million in investments to
    qualify as large accredited investors.
  • Individuals now considered accredited because
    they have 1 million in net worth or annual
    income of 200,000 (or 300,000 with one's
    spouse) will be required to own 2.5 million in
    investments or have annual income of 400,000 (or
    600,000 with one's spouse) to qualify as large
    accredited investors).
  • Legal entities that are not subject to
    dollar-amount thresholds to qualify as accredited
    investors, generally government-regulated
    entities, would not be subject to dollar-amount
    thresholds to qualify as large accredited
    investors.
  • An entity in which all the equity owners are
    large accredited investors would itself be a
    large accredited investor.
  • Based on estimates from the Office of Economic
    Analysis, 1.64 percent of U.S. households would
    qualify as large accredited investors, compared
    with 8.47 percent that would qualify as
    accredited investors. The dollar amount
    thresholds for investors to qualify as large
    accredited investors reflects an attempt by the
    SEC to approximate the standards adopted by the
    SEC in the 1980s for accredited investors.

20
SIMILARITIES OF NEW RULE 507 TO EXISTING RULE 506
  • Allow an issuer to sell an unlimited amount of
    its securities to an unlimited number of
    investors who are accredited investors in the
    case of Rule 506 transactions and large
    accredited investors in the case of Rule 507
    transactions.
  • No limits on the payment of commissions or
    similar transaction-related compensation.
  • Non-exclusive the issuer could choose to claim
    any other available exemption without the benefit
    of the rule.
  • Securities acquired in a Rule 507 transaction
    would be subject to the limitations on resale
    under Rule 502(d) and therefore would be treated
    as "restricted securities" as defined in
    Securities Act Rule 144(a)(3)(ii).
  • Obligation to file a Form D notice of sales with
    the SEC.
  • In addition, proposed Rule 507 would include the
    same disqualification provisions as are also
    proposed in the release for other Regulation D
    exemptions. Currently, Rule 506 has no bad actor
    disqualification provisions.
  • Securities sold under Rule 506 are "covered
    securities" under Section 18(b)(4)(D) of the
    Securities Act. Securities sold under Rule 507
    would also be covered securities, but under
    Section 18(b)(3) of the Securities Act. Covered
    securities are preempted from most state
    securities regulation as provided under Section
    18 of the Securities Act.

21
DIFFERENCES BETWEEN RULE 507 AND RULE 506
  • Principal Differences between Rule 507 and Rule
    506
  • Large Accredited Investor Standard. Rule 507
    would be premised on the concept of large
    accredited investors. Rule 506 would continue to
    be premised on the concept of accredited
    investors.
  • Limited Advertising Permitted. Instead of a
    total ban on general solicitation and general
    advertising, as is the case in Rule 506
    transactions, issuers in Rule 507 transactions
    could engage in limited advertising that
    satisfies the requirements of the rule. All
    other general solicitation and advertising would
    be prohibited.
  • No Sales to Persons Who Do Not Qualify as Large
    Accredited Investors. Issuers in Rule 507
    transactions would not be allowed to sell
    securities to any investor who does not qualify
    as a large accredited investor. In Rule 506
    transactions, issuers may sell securities to an
    unlimited number of accredited investors and up
    to 35 non-accredited investors.
  • Authority for Exemption. Rule 507 would be
    adopted as an exemption primarily under the SEC's
    general exemptive authority under Section 28 of
    the Securities Act, while Rule 506 was adopted as
    a safe harbor under Section 4(2) of the
    Securities Act. A Rule 507 offering might not be
    a private offering.

22
RULE 507 LIMITED ADVERTISING
  • Limited Advertising Permitted
  • Rule 507 would permit an issuer in an exempt
    transaction to publish a limited announcement of
    an offering.
  • The announcement would be required to state
    prominently that
  • Sales will be made to large accredited investors
    only
  • No money or other consideration is being
    solicited or will be accepted through the
    announcement
  • The securities have not been registered with or
    approved by the SEC and are being offered and
    sold pursuant to an exemption.

23
PERMITTED ADDITIONAL INFORMATION
  • At the issuer's option, the announcement also
    could contain the following additional
    information
  • The name and address of the issuer
  • A brief description of the business of the issuer
    in 25 or fewer words
  • The name, type, number, price, and aggregate
    amount of securities being offered and a brief
    description of the securities
  • A description of what large accredited investor
    means
  • Any suitability standards and minimum investment
    requirements for prospective purchasers in the
    offering and
  • The name, postal or e-mail address, and telephone
    number of a person to contact for additional
    information.
  • The permitted publication could only be "in
    written form" but could occur in any written
    medium, such as in a newspaper or on the
    Internet. Radio or television broadcast spots or
    "infomercials" would be prohibited.

24
ADVERTISING LIMITATIONS FOR 3(c)(1) AND 3(c)(7)
FUNDS
  • Proposed Rule 507 would be an exemption from
    the registration provisions of Section 5 of the
    Securities Act under the SECs general exemptive
    authority in Section 28 of that Act.
  • By contrast, Rule 506 is promulgated under
    Section 4(2) of the Securities Act for issuer
    transactions not involving a public offering
    Accordingly, pooled investment vehicles that rely
    on Rule 506 may also rely on the exclusion from
    the definition of "investment company" provided
    by Section 3(c)(1) or Section 3(c)(7) of the
    Investment Company Act, which requires that the
    issuers not make public offerings.
  • Accordingly, any pooled investment vehicle
    relying on the large accredited investor
    exemption of Rule 507 would not be able to take
    advantage of the limited advertising permitted
    under Rule 507 if it also wanted to use the
    Section 3(c)(1) or Section 3(c)(7) exemptions
    under the Investment Company Act.

25
OTHER AMENDMENTS TO REGULATION D
  • Proposed Revisions Related to Definition of
    "Accredited Investor in Rule 501(a) of
    Regulation D
  • Among the proposed revisions
  • Add an alternative "investments-owned" standard
    to Rule 501(a)
  • Define the term "joint investments"
  • Establish a mechanism to adjust the dollar-amount
    thresholds in the definitions in the future to
    reflect inflation and
  • Add several categories of permitted entities to
    the list of accredited and large accredited
    investors.

26
OTHER AMENDMENTS TO REGULATION D(cont.)
  • Adding Alternative Investments-Owned Standards
    to Accredited Investor Standards
  • Rule 501(a) currently provides that certain
    legal entities must have total assets in excess
    of 5,000,000 to qualify as accredited investors,
    that individuals and spouses may qualify if they
    have a net worth above 1,000,000, or if they
    have annual income above 200,000 (or combined
    spousal annual income of 300,000). The proposal
    would add alternative standards for these
    entities and individuals that reflect investments
    owned by the prospective investor as an
    additional and alternative method of establishing
    accredited investor status.
  • Amount of Investments Required
  • Legal entities in lieu of 5,000,000 assets
    test, entities now subject to the 5,000,000
    assets test could satisfy alternative standard of
    5,000,000 in investments.
  • Individuals and spouses in lieu of current
    net worth standard of 1 million or annual
    income standards of 200,000 (or 300,000 with
    one's spouse), individuals could satisfy new
    alternative standard of 750,000 in investments

27
OTHER AMENDMENTS TO REGULATION D(cont.)
  • Proposed Definition of "Investments"
  • The current definition of accredited investor
    counts all of the assets that an individual owns
    jointly with a spouse in determining whether the
    investor has a "joint net worth" with the spouse
    of more than 1 million.
  • Excluded from investments under proposed
    Rule
  • 50 of any investments held jointly with the
    individual's spouse unless the spouse is a
    co-signer of the investment documents and equally
    bound
  • Any real estate used for personal purposes (e.g.,
    personal residences or summer homes)
  • Any real estate used for trade or business
    purposes

28
OTHER AMENDMENTS TO REGULATION D(cont.)
  • Future Inflation Adjustments
  • The proposal would adjust for inflation all
    dollar-amount thresholds set forth in Rule 501 of
    Regulation D on a going forward basis, starting
    on July 1, 2012, and every five years thereafter,
    to reflect any changes in the value of the
    Personal Consumption Expenditures Chain-Type
    Price Index (or any successor index thereto), as
    published by the Department of Commerce, from
    December 31, 2006.
  • Adding Categories of Entities to List of
    Accredited and Large Accredited Investors
  • The proposed definition of accredited investor
    in Rule 501(a)(3) would be expanded to include
    limited liability companies, not-for-profit
    corporations, Indian tribes, labor unions,
    governmental bodies, and similar legal entities.

29
INTEGRATION SHORTENING THE SAFE HARBOR WAITING
PERIOD
  • Rule 502 of Regulation D provides a safe harbor
    form the integration safe harbor.
  • The integration doctrine seeks to prevent an
    issuer from improperly avoiding registration by
    artificially dividing a single offering into
    multiple offerings such that Securities Act
    exemptions would apply to the multiple offerings
    that would not be available for the combined
    offering.
  • Under the safe harbor, offers and sales
    completed more than 6 months before or after a
    Regulation D offering are not be considered part
    of the same offering.
  • The current proposal would lower the safe
    harbor time frame from 6 months to 90 days, which
    would permit an issuer to rely on the safe harbor
    once every fiscal quarter.

30
Integration (contd)
  • Example
  • Since Rule 506 prohibits the use of general
    solicitation and advertising and Rule 507 permits
    a public announcement of the offering, neither of
    these two exemptions would be available if two
    offerings were considered as integrated where one
    offering used limited public advertising and the
    other offering was conducted under Rule 506,
    which does not permit advertising. Similarly, a
    507 offering can be made only to large accredited
    investors, and integration with a 506 offering
    that was made to non-large accredited investors
    would make the 507 exemption unavailable.
  • After 90 days, however, the new safe harbor
    would apply, and a Rule 506 offering could be
    conducted 90 days after completion of a Rule 507
    offering, and vice versa, allowing issuers to
    make offerings without integration concerns after
    waiting the requisite period of time.

31
EXPANDED SCOPE OF DISQUALIFICATION PROVISIONS
  • At present, the disqualifications provisions of
    Regulation D apply only to Rule 505 offerings.
    They do not apply to Rule 506 offerings.
  • As proposed, the disqualification provisions in
    new Rule 502(e) would apply to all offerings made
    in reliance on Regulation D, precluding reliance
    by the issuer on Regulation D if the issuer
    itself is disqualified or the presence of any of
    the enumerated persons disqualifies the issuer.
  • The bad actor disqualification provisions under
    proposed Rule 502(e) would apply to
  • The issuer, any predecessor of the issuer, and
    any affiliated issuer
  • Any director, executive officer, general partner,
    or managing member of the issuer
  • Any beneficial owner of 20 percent or more of any
    class of the issuer's equity securities and
  • Any promoter connected with the issuer.

32
DISQUALIFICATION (cont.)
  • Proposed Rule 502(e) provides six
    disqualification provisions that would preclude
    an issuer from relying on Regulation D. Each of
    the disqualification provisions requires a
    determination by a government official or agency
    or self-regulatory organization that the relevant
    person has violated the law or engaged in other
    wrongdoing.
  • Disqualification occurs if the issuer or the
    covered persons
  • Filed a registration statement within the last 5
    years that is the subject of a currently
    effective permanent or temporary injunction or an
    administrative stop order
  • Was convicted of a criminal offense in the last
    10 years that was in connection with the offer,
    purchase or sale of a security or involved the
    making of a false filing with the SEC
  • Has been subject to an adjudication or
    determination within the last 5 years by a
    federal or state regulator that the person
    violated federal or state securities or
    commodities law or a law under which a business
    involving investments, insurance, banking or
    finance is regulated
  • Is subject to an order, judgment or decree by a
    court entered within the last 5 years that
    restrains or enjoins the issuer or a person from
    engaging in any conduct or practice involving
    securities and other similar businesses,
    including an order for failure to comply with
    Rule 503 (the filing of Form D)
  • Is subject to a cease and desist order entered
    within the last 5 years issued under federal or
    state securities or similar laws
  • Is subject to a suspension or expulsion from
    membership in or association with a member of a
    national securities exchange or national
    securities association for an act or omission
    constituting conduct inconsistent with just and
    equitable principles of trade.

33
Conclusion
  • The SEC has an ambitious agenda.
  • The anti-fraud rules have been expanded.
  • The familiar provisions of Regulation D, almost
    unchanged in 25 years, will undoubtedly change.
  • The large accredited investor standard is
    waiting in the wings as a further limitation on
    the ability to rely on Regulation D in making
    private offerings.

34
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