What is the “Bad Actor” Ruling?
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. The disqualification and related disclosure provisions appear as paragraphs (d) and (e) of Rule 506 of Regulation D (Click Here to read more).
Essentially the ruling reads that if you are raising capital under a certain specifications then you can be disqualified from raising capital if anyone associated with your raise has a disqualifying event.
Under the final rule, disqualifying events include:
- Certain criminal convictions
- Certain court injunctions and restraining orders
- Final orders of certain state and federal regulators
- Certain SEC disciplinary orders
- Certain SEC cease-and-desist orders
- SEC stop orders and orders suspending the Regulation A exemption
- Suspension or expulsion from membership in a self-regulatory organization (SRO), such as FINRA, or from association with an SRO member
- U.S. Postal Service false representation orders
So What Now?
Fortunately, the SEC gave business owners an easy way out. The ruling has a “Reasonable Care Exception” that reads, “The final rule provides an exception from disqualification when the issuer is able to demonstrate that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering.”
This means if you do your due diligence FIRST then you are protected.