On July 10, 2013, the Securities and Exchange Commission adopted bad actor disqualification provisions for Rule 506 of Regulation D under the Securities Act of 1933, to implement Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The disqualification and related disclosure provisions appear as paragraphs (d) and (e) of Rule 506 of Regulation D.
As a result of Rule 506(d) bad actor disqualification, an offering is disqualified from relying on Rule 506(b) and 506(c) of Regulation D if the issuer or any other person covered by Rule 506(d) has a relevant criminal conviction, regulatory or court order or other disqualifying event that occurred on or after September 23, 2013, the effective date of the rule amendments. Under Rule 506(e), for disqualifying events that occurred before September 23, 2013, issuers may still rely on Rule 506, but will have to comply with the disclosure provisions of Rule 506(e). Since Donald Trump is a serial entrepreneur he should be aware whether any of his past or current convictions, regulatory and order events will define him as a bad actor or trigger a mandatory disclosure.
The rule covers the issuer, including its predecessors and affiliated issuers, as well as:
Directors and certain officers, general partners, and managing members of the issuer.
20 percent beneficial owners of the issuer.
Investment managers and principals of pooled investment funds.
Persons compensated for soliciting investors as well as the general partners, directors, officers, and managing members of any compensated solicitor.
Under the final rule, a “disqualifying event” includes:
Criminal convictions in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries. The criminal conviction must have occurred within 10 years of the proposed sale of securities (or five years in the case of the issuer and its predecessors and affiliated issuers).
Court injunctions and restraining orders in connection with the purchase or sale of a security, making of a false filing with the SEC, or arising out of the conduct of certain types of financial intermediaries. The injunction or restraining order must have occurred within five years of the proposed sale of securities.
Final orders from the Commodity Futures Trading Commission, federal banking agencies, the National Credit Union Administration, or state regulators of securities, insurance, banking, savings associations, or credit unions that …
Bar the issuer from associating with a regulated entity, engaging in the business of securities, insurance or banking, or engaging in savings association or credit union activities, or… Are based on fraudulent, manipulative, or deceptive conduct and are issued within 10 years of the proposed sale of securities.
Certain SEC disciplinary orders relating to brokers, dealers, municipal securities dealers, investment companies, and investment advisers and their associated persons.
SEC cease-and-desist orders related to violations of certain anti-fraud provisions and registration requirements of the federal securities laws.
SEC stop orders and orders suspending the Regulation A exemption issued within five years of the proposed sale of securities.
Suspension or expulsion from membership in a self-regulatory organization (SRO) or from association with an SRO member.
U.S. Postal Service false representation orders issued within five years before the proposed sale of securities.
DISCLOSURE OF PRE-EXISTING DISQUALIFYING EVENTS
Disqualification applies only for disqualifying events that occur after September 23, 2013 But matters that existed before September 23, 2013 and would otherwise be disqualifying are subject to a mandatory disclosure requirement to investors. It’s always recommended that questions regarding disclosure requirements should be discussed with a Securities Attorney.
Donald Trump has been involved in as many as 169 federal lawsuits since 1983. The bad actor disqualifying events are mostly focused with securities related issues therefor not all convictions, regulatory and order events result in a disqualification.
In January 2002, Trump Hotels and Casino Resorts (“THCR”) was issued a cease and desist order from the SEC. The SEC found that in October 1999 Trump Hotels, through the conduct of its CEO (Trump), its CFO, and its treasurer, violated antifraud provisions Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by knowingly or recklessly issuing a materially misleading press release. The company, which consented to the issuance of the SECs order without admitting or denying the findings, was ordered to stop doing such things. Says one SEC official: “This case demonstrates the risks involved in mishandling pro forma reporting.”
As of now, Donald Trump is not disqualified as a bad actor since the disqualifying event occurred before September 23, 2013. If Donald Trump is ever a covered person of an Issuer raising capital through a Regulation D 506(b) or a 506(c) exemption, then the Issuer will most likely be required to include a disclosure in its offering materials.