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Bad Actor FAQ

Bad Actor FAQ

All Rule 506, Reg A/A+, and Regulation Crowdfunding deals now require a Bad Actor Check. EarlyIQ bad actor compliance reports will reveal if an offering is disqualified from relying on Rule 506(b) and 506(c) of Regulation D, Regulation Crowdfunding as well as Reg A/A+.

 

 

 

Who is Covered under the Bad Actor Disqualification?

Per the SEC, the following people and entities are considered "covered persons" and are disqualified from offering securities under Rule 506 of Regulation D, Regulation Crowdfunding, or Regulation A:

  • The issuer and any predecessor of the issuer or affiliated issuer;
  • Any director, general partner or managing member of the issuer;
  • Any executive officer and officers participating in the offering;
  • Any 20 percent beneficial owner of the issuer;
  • Any promoter—that is, any person or entity that directly or indirectly takes initiative in founding the issuer, or in connection with the founding of the issuer, receives 10% or more of any class of the issuer's securities, or 10% of the proceeds from the sale of any class of the issuer's securities;
  • Any investment manager or principal of pooled investment funds offering securities;
  • Any person that has been or will be compensated for solicitation of purchasers in connection with sales of securities in the offering ("compensated solicitor"); and
  • Any director, officer, general partner or managing member of any such compensated solicitor.

 

 

What is a "Bad Actor" Disqualifying Event?

The issuer (or any other person covered by Rule 506(d)) is disqualified if they have a relevant criminal conviction, regulatory or court order or other disqualifying event that occurred on or after September 23, 2013. Events prior to this date will be disclosed, but do not disqualify the issuer. The following events can result in being disqualified:

Criminal Convictions  A conviction within the previous ten years - any felony or misdemeanor in connection with the purchase or sale of a security, involving the making of any false filing with the Commission, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser, or paid solicitor of purchasers of securities.

Commission Disciplinary Orders  Being subject to an order of the SEC - any order of the Securities and Exchange Commission entered pursuant to Section 15(b) or 15B(c) of the Securities Exchange Act of 1934, or Section 203(e) or (f) of the Investment Advisers Act of 1940 that suspends or revokes the covered person's registration as a broker, dealer, municipal securities dealer or investment adviser; places limitations on the activities, functions or operations of the covered person; or bars the covered person from being associated with any entity or participating in the offering of any penny stock.

Certain Commission Cease-and-Desist Orders  Being subject to any order of the SEC entered within the previous five years - any order of the Securities and Exchange Commission that orders the covered person to cease and desist from committing or causing a violation of or future violation of any scienter-based anti-fraud provision of the federal securities laws; or Section 5 of the Securities Act of 1933.

Court Injunctions and Restraining Orders  Being subject to any injunction entered within the previous five years - any order, judgment or decree of any court of competent jurisdiction that restrains or enjoins a covered person from engaging or continuing to engage in any conduct or practice in connection with the purchase or sale of a security, involving the making of any false filing with the Commission, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser, or paid solicitor of purchasers of securities.

Final Orders of Certain Regulators  Being subject to any final order within the previous ten years - any final order of a state securities commission, state banking regulator, state insurance commission, federal banking regulator, the U.S. Commodity Futures Trading Commission, or the National Credit Union Administration that bars the covered person from association with any entity regulated by such commission, authority, agency, or officer; engaging in the business of securities, insurance or banking; engaging in savings association or credit union activities; or that constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative or deceptive conduct.

Suspension of Expulsion  Being suspended or expelled from Self-Regulated Organization (SRO) Membership or Association with an SRO Member - any suspension or expulsion from membership in, or suspension or bar from association with a member of, a registered national securities exchange or a registered national or affiliated securities association for any act or omission to act constituting conduct inconsistent with just and equitable principals of trade.

Stop Orders and Orders Suspending the Regulation A Exemption  Having participated in a stopped or suspended Reg A offering - any participation in any registration statement or Regulation A offering statements filed with the Securities and Exchange Commission that was the subject of a refusal order, stop order, or order suspending the Regulation A exemption.

United States Postal Service False Representation Orders  Being subject to a United States Postal Service false representation order - any United States Postal Service false representation order, or any temporary restraining order or preliminary injunction with respect to conduct alleged by the United States Postal Service to constitute a scheme or device for obtaining money or property through the mail by means of false representations.

 

How does EarlyIQ perform a Bad Actor Check?

EarlyIQ goes above and beyond what the SEC deems the "reasonable steps" to find and disclose any "Bad Actor" disqualifying events for each covered person. This involves both criminal and regulatory checks. Covered persons come to the EarlyIQ website and complete a personal application. Multiple databases are searched, covering the 8 areas listed above. Specifically, the checks include:

  • Identity Verification
  • Patriot Act / OFAC database check 
  • Criminal records search
  • Regulatory Administrative Orders and Enforcement Actions
  • SEC Administrative Orders and Litigation Releases 
  • CFTC
  • FDIC and NCUA
  • Office of the Comptroller
  • FINRA and IAPD Enforcement Actions
  • USPS
  • Federal Reserve Bank Enforcement 
  • State Securities and Bank Regulators
  • Business Entity Check (for company compliance reports only)

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