Recently, the Securities and Exchange Commission (“SEC”) created a bright-line standard regarding the term “voting equity securities” for purposes of the bad actor provisions of Rule 506(d) under the Securities Act of 1933, as amended (“Rule 506(d)”).¹ As discussed in our August 2013 memorandum, Rule 506(d) disqualifies securities offerings involving certain bad actors, including 20% beneficial owners of a fund’s voting equity securities who have had a disqualifying event, from reliance on the Rule 506 offering exemptions. When it adopted Rule 506(d), the SEC declined to define the term “voting equity securities” and indicated that the term should be applied based on factors such as whether securityholders have the ability, either currently or on a contingent basis, to control or significantly influence the management and policies of the issuer through the exercise of a voting right. Under the SEC’s new guidance, “voting equity securities” includes only those securities which, by their terms, currently entitle the holder to vote for the election of directors. The new SEC guidance states that the term should be read to denote securities having a right to vote that is presently exercisable, irrespective of the existence of control or significant influence.

In light of the SEC’s new guidance, advisers to private investment funds should consider whether a fund’s securityholders have a presently exercisable right to vote for the election of the fund’s directors, managing member, or general partner, as applicable. In the event a greater than 20% securityholder does not have this right, it would not be considered a covered person and would not need to be tracked or questioned for purposes of Rule 506(d). The determination of whether a fund’s securityholders have this voting right would be based on the fund’s governing documents and applicable law.

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If you have any questions regarding the information discussed above, please contact your Investment Management Group attorney at Seward & Kissel LLP.

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¹ Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A), Securities Act Release No. 9741, 80 Fed. Reg. 21,805

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If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.