SEC Issues Guidance On 'Bad Actor' Rules; Delaware Court Of Chancery Dismisses Former Director's (January 2014 Corporate Alert

SEC Issues Guidance on "Bad Actor" Rules

The Division of Corporation Finance (the "Division") of the U.S. Securities and Exchange Commission ("SEC") recently issued guidance on the recently adopted "bad actor" rules added to Rule 506 of Regulation D under the Securities Act of 1933 (the "Bad Actor Rules"). Effective as of September 23, 2013, the Bad Actor Rules disqualify an issuer from engaging in Rule 506 offerings if such issuer or any of its covered persons experiences a "disqualifying event," including, without limitation, certain criminal convictions, court injunctions and restraining orders. Covered persons include the issuer and its "affiliated issuers," directors, general partners, managing members and 20% beneficial owners, as well as solicitors and placement agents acting on behalf of the issuer.

In order to address the concerns of private fund managers and other issuers who regularly engage in Rule 506 private offerings, the Division amended its Compliance and Disclosure Interpretations to resolve certain areas of confusion in the Bad Actor Rules. In particular, the Division defined the term "affiliated issuer" for purposes of the Bad Actor Rules to mean an entity that is an affiliate of the issuer that is issuing securities in the same offering. The Division's definition clarifies that the term "affiliated issuer" does not cover separate private funds that share a common investment adviser, provided that such funds are not issuing securities in the same offering.

The Division also provided guidance on solicitors and placement agents that act on behalf of an issuer in a Rule 506 offering. The Division clarified that "participation in the offering" by a solicitor or placement agent under the Bad Actor Rules is not limited to solicitation activities only. Rather, it also includes participation or involvement by such solicitor or placement agent in due diligence activities, the preparation of offering materials, providing structuring or other advice to the issuer, and communicating about the offering. By contrast, administrative activities such as opening brokerage accounts, wiring funds, and bookkeeping activities would generally not be deemed to be "participation in the offering." In addition, the Division clarified that issuers must send out disclosures on disqualifying acts by solicitors and placement agents to all investors, not just those introduced to the issuer by the solicitor or placement agent. The Division's guidance also confirms that timely termination of a solicitor or placement agent that has experienced a disqualifying event can preserve an issuer's ability to rely on Regulation D with respect to future offerings.

Delaware Court of Chancery Dismisses Former Director's Section 220(d) Claim

The Delaware Court of Chancery recently granted a motion to dismiss against a former director and non-stockholder of DAG SPE Managing Member, Inc. who sought to inspect the books and records of the corporation pursuant to DGCL 220(d). Three days after his removal as a director by the shareholders, the former director made a written demand on the corporation for books and records relating to certain of the corporation's actions during his...