Bad Actor Disqualification
Definition
Bad actor disqualification refers to securities-law rules that disqualify issuers and covered persons from using certain exemptions, including Rule 506, after specified criminal, regulatory, court, or disciplinary events. The rules are designed to keep certain problematic actors from raising capital through exempt offerings.
Why it matters
Private offerings depend on exemptions. If a covered person is disqualified and no exception or waiver applies, the offering exemption can be impaired. For investors, bad actor diligence is part of sponsor diligence, especially in smaller SPVs, private credit platforms, real estate syndications, and manager-led funds.
Common misconceptions
- •Bad actor checks are not limited to the issuer entity; covered persons can include directors, officers, promoters, placement agents, and beneficial owners above specified thresholds.
- •A clean marketing deck does not prove bad actor compliance.
- •Disclosure of prior events and formal disqualification are related but not identical issues.
Technical details
Covered persons
Covered persons can include the issuer, predecessor entities, affiliated issuers, directors, executive officers, participating officers, general partners, managing members, promoters, investment managers, compensated solicitors, and certain large beneficial owners.
Placement agents and finders can also matter because their disciplinary history may affect the offering exemption.
Disqualifying events
Events can include certain securities-related criminal convictions, court injunctions, SEC orders, final orders from state or federal regulators, suspension or expulsion from self-regulatory organizations, and false representation orders.
Timing matters because lookback periods vary by event type and covered person.
Investor diligence
Ask whether the issuer has completed bad actor questionnaires for covered persons and whether any events required disclosure or waiver analysis.
For platform deals, ask whether the platform, issuer, manager, placement agent, and sponsor each complete their own checks.