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The Bad Actor rule of Regulation D


On July 10, 2013 the Securities and Exchange Commission adopted bad actor disqualification provision for Rule 506 of Regulation D under Securities Act of 1933, to implement Section 926 of Dodd-Frank Wall Street Reform and Consumer Protection Act. The disqualification and related disclosure provision appear as paragraphs (d) and (e) of Rule 506, of Regulation D. The Bad Actor rule prohibits company (the issuer) to use registration exemption if the issuer or any other associated person has been convicted of or subjected to judicial or regulatory sanctions for certain violation of U.S law.

Exemption from registration under Regulation D helps thousand of businesses to raise capital worth billions of dollars. The “Bad Actor” rule is codified as new paragraphs (d) and (e) to Rule 506.  Rule 506(d) 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:
  • the issuer, including its predecessors and affiliated issuers
  • directors, general partners and managing members of the issuer
  • executive officers of the issuer, and the other officers of the issuers that participate in the offering
  • 20% beneficial owners of the issuer, calculated on the basis of total voting power
  • promoters connected to the issuer
  • for pooled investment fund issuers, the fund's investment managers and its principals
  • persons compensated for soliciting investors, including their directors, general partners and managing members.
The disqualifying acts specified under Rule 506(b) fall into following categories:

  • criminal convictions involving securities
  • court conjunctions and restraining orders relating to securities transactions, false SEC filings, securities related business activities 
  • final orders of certain state and federal regulations that bars the covered person from associating with a regulated entity or engaging in business of securities, insurance and banking or engaging in savings associations or credit union activities that are based  on violation of anti-fraud rules.
  • SEC disciplinary orders that suspend or revoke registration of regulated person, limits  the activities of such person and bans association of such person with any penny stock
  • SEC cease-and-desist orders with respect to the scienter-based antifraud provisions of federal securities law  or violation of Section 5 of Securities Act
  • SEC stop orders and orders suspending Regulation A exemption
  • suspension or expulsion from self-regulatory organization such as FINRA
  • U.S. Postal Service false representation
Rule 506 of regulation D gives companies the opportunity to raise unlimited amount of capital from unlimited number of accredited investors without requirement to register securities with SEC, remaining a private company and avoiding lengthy and costly process of going public. The Bad Actor rule requires from issuer to investigate the background of its officers, directors and associates. Disregard of the rule will make offering illegal and can incur harsh penalties. To defend itself from liability company must show that it didn't and could not have known of disqualification act in the exercise of reasonable due diligence.


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Location: West Palm Beach, FL, USA

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