The bad actor disqualification of Rule 506(d) of the securities laws is a provision that disqualifies certain issuers from using the safe harbor provided by Rule 506 of Regulation D of the Securities Act of 1933. The rule is intended to protect investors by preventing issuers with a history of securities law violations from using the exemption provided by Rule 506.
The Rule 506 bad actor provisions apply to any “covered person,” which includes the issuer, any predecessor of the issuer, any affiliated issuer, any director, executive officer, other officer participating in the offering, general partner, or managing member of the issuer, any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities, any promoter connected with the issuer in any capacity at the time of sale, and any compensated solicitor or finder.
The rule disqualifies an issuer from using the exemption provided by Rule 506 if any covered person has a “disqualifying event,” which includes any conviction, court injunction, or final order for certain securities law violations, as well as certain regulatory and administrative actions. The rule also disqualifies an issuer if any covered person is subject to certain types of disqualification by the SEC, such as being a “bad actor” under Section 9(a) of the Investment Company Act of 1940.
Overall, the bad actor rule of Rule 506(d) is an important provision of securities laws that serves to protect investors by disqualifying issuers with a history of securities law violations from using the safe harbor provided by Rule 506 of Regulation D. The cases that have interpreted the rule have established that it applies to a wide range of conduct, including violations of the securities laws, regulatory and administrative actions, and certain types of disqualification by the SEC.
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.