Bad Actors
What’s a “Bad Actor”?
Per SEC rules, no company may raise capital if any officer, director, promoter or beneficial owner of 20% or more of its equity is a “Bad Actor”.
On July 10, 2013, the SEC adopted bad actor disqualification provisions for Rule 506 (b & c) of Regulation D under the Securities Act of 1933, to implement Section 926 of the Dodd-Frank Act. This rule prohibits a company from raising capital if the issuer or any associated person has, among other things, been convicted of, or is subject to judicial or regulatory sanctions for, certain violations of law.
Overview of the Bad Actor Rule
The “Bad Actor” rule is codified as new paragraphs (d) and (e) to Rule 506. Rule 506(d)(1) provides that the exemptions in Rule 506(b) and Rule 506(c) are not available if the issuer or any associated person is statutorily disqualified. This includes all of the following:
ISSUER
The company selling securities, any predecessor of the issuer (prior entity), and any affiliated issuer
ASSOCIATED PERSONS
- Directors, general partners, and managing members of the issuer;
- Executive officers of the issuer, and other officers participating in the offering;
- 20 percent beneficial owners of the issuer;
- Promoters;
- Investment managers and principals of pooled investment funds; and
- Any person compensated for soliciting investors.
Events that trigger disqualification under the rule include:
- Criminal convictions relating to securities transactions, false filings with the SEC, or certain securities-related businesses;
- Court injunctions and restraining orders relating to securities transactions, false SEC filings, securities-related business activities, or obtaining money or property through the mail by means of false representations;
- Final orders of certain financial regulators that bar the covered person from associating with a regulated entity or engaging in certain financial business activities, or that are based on a violation of antifraud rules, or any postal service false representation order;
- SEC orders revoking the registration of a regulated person, limiting the activities of such a person, or imposing industry, collateral or penny stock bars;
- SEC cease-and-desist orders with respect to the scienter-based antifraud rules or violations of Section 5;
- Suspension or expulsion from a self-regulatory organization; and
- In the case of any registrant, issuer or underwriter named in any registration statement or Regulation A offering statement filed with the SEC, the issuance of a suspension or stop order with respect to such registration statement or offering statement, or any ongoing investigation relating to the same.
The look-back period is five years, except in the case of criminal convictions (for persons other than the issuer, its predecessors, and affiliated issuers) and certain regulatory orders based on antifraud violations, for which the look-back is ten years, and for certain SEC or SRO suspensions, revocations, bars, expulsions, and related orders, which result in disqualification so long as they remain in effect.
