Glossary
Bad actor disqualification
What the bad actor rules in Reg CF and Rule 506 are, who counts as a covered person, which events disqualify an offering, and the exceptions.
Bad actor disqualification bars a company from using an offering exemption when the company, or a person closely connected to the offering, has certain past securities violations. One bad actor disqualifies the whole offering. The rules are 17 CFR 227.503 for Regulation Crowdfunding and Rule 506(d) for Regulation D Rule 506; Regulation A has a parallel rule.
Who is a covered person
In Reg CF: the issuer, its predecessors and affiliated issuers, every director and officer, any general partner or managing member, anyone owning 20% or more of the voting equity, any promoter, and anyone paid to solicit investors along with that solicitor's directors and officers. Rule 506(d) covers a similar list, but limits officers to executive officers and officers participating in the offering.
Disqualifying events
Securities-related criminal convictions (within ten years, or five for the issuer), court injunctions and restraining orders within five years, final orders of state securities, banking, and insurance regulators and certain federal agencies, SEC disciplinary orders, SEC cease-and-desist orders within five years, suspension or expulsion from FINRA or an exchange, SEC stop orders, and U.S. Postal Service false representation orders.
Events before the rule's cut-off date do not disqualify; they must be disclosed instead. The cut-off is May 16, 2016 for Reg CF and September 23, 2013 for Rule 506.
Exceptions
An SEC waiver for good cause; a written statement from the court or regulator that disqualification should not arise; and reasonable care, where the issuer did not know and could not have known after a factual inquiry. That inquiry, usually a questionnaire for every covered person, is why the check belongs at the start of planning.
Further reading
- Who cannot use Reg CF, and the bad actor check
- Rule 506(b): the private raise most companies already use
- Corporate housekeeping to finish before you file a raise
This page is general information about securities rules, not legal advice. Whether a particular event disqualifies an offering is a question for securities counsel.