Bad Actor Disqualification (Rule 506(d)): What Disqualifies an Issuer From Raising Capital

An issuer is disqualified from raising capital under Reg-D 506, Reg-A, or Reg-CF if the issuer — or any "covered person" connected to the offering — has experienced a "bad actor" disqualifying event, such as a securities-related criminal conviction, an SEC or state regulatory bar, or a court injunction within the relevant look-back period. When a disqualification applies and no exception or waiver is available, the issuer cannot use the exemption at all, which means the offering has no lawful path to close.

The "bad actor" rules exist to keep repeat securities-law violators from accessing the exempt-offering markets that fund most equity crowdfunding. They were adopted under Section 926 of the Dodd-Frank Act and took effect on September 23, 2013. Because the disqualification can attach to people who are not the founder — a 20% owner, a placement agent, an outside director — screening for it is a due-diligence step every issuer should complete before marketing a raise, not after. This article explains who is covered, what events disqualify, the look-back periods, and the exceptions issuers typically rely on.

Which exemptions the bad actor rules cover

Bad actor disqualification is not unique to one exemption. Substantially parallel provisions run across the exempt offerings issuers use to raise capital publicly:

The three rules share the same architecture — a defined set of covered persons and a defined list of disqualifying events — with modest differences in detail. If you are still deciding which exemption fits your raise, our comparison of Reg-D 506(b) vs 506(c) solicitation rules and our Reg-CF vs Reg-A+ cost breakdown map the trade-offs. The bad actor check applies whichever one you choose.

Who is a "covered person"?

The disqualification reaches far beyond the company itself. Under Rule 506(d), the following are covered persons whose disqualifying events can taint the entire offering:

• The issuer, along with any predecessor and any affiliated issuer.
• Directors, executive officers, and other officers participating in the offering, plus general partners and managing members of the issuer.
• 20% beneficial owners — any person who beneficially owns 20% or more of the issuer's outstanding voting equity securities, calculated by voting power.
• Promoters connected with the issuer at the time of sale.
• Investment managers of an issuer that is a pooled investment fund, and their principals.
• Compensated solicitors — any person paid to solicit investors (such as a placement agent), together with that firm's directors, executive officers, other participating officers, general partners, and managing members.

This breadth is the trap most issuers underestimate. A clean founder does not make a clean offering if a 20% investor, an advisory-board member who is also an executive officer, or a paid solicitor carries a disqualifying event. Reg-A and Reg-CF define covered persons similarly, so the screening list is essentially the same across exemptions.

What events trigger disqualification

A covered person triggers disqualification if, within the applicable look-back period, they have been subject to one of the enumerated events below. The look-back is measured from the date of sale (or, for Reg-A, qualification; for Reg-CF, the filing of the offering statement).

Look-back periods and event definitions are set by rule and are periodically revised; the specifics above reflect the framework as adopted. Confirm the current text of Rule 506(d), Rule 262, and Rule 503 with qualified securities counsel before relying on any single threshold.

The three ways an issuer avoids disqualification

A disqualifying event does not automatically end an offering. Three mechanisms can preserve the exemption, and issuers typically evaluate each in order:

1. The reasonable care exception. An issuer is not disqualified if it can establish that it did not know, and in the exercise of reasonable care could not have known, that a covered person had a disqualifying event. "Reasonable care" is a factual standard — the SEC has indicated it generally requires a factual inquiry into covered persons, the depth of which scales with the circumstances. In practice this means bad-actor questionnaires and background checks documented before the raise, not a verbal assurance after the fact.
2. A waiver for good cause. The SEC may grant a waiver of disqualification upon a showing of good cause that it is not necessary under the circumstances. A state securities regulator that issued the triggering order may similarly waive it. Waivers are discretionary and fact-specific.
3. The pre-existing event carve-out (with disclosure). Events that occurred before September 23, 2013 — the rule's effective date — do not themselves trigger disqualification. Under Rule 506(e), however, the issuer must disclose those pre-existing matters to investors a reasonable time before sale. A pre-2013 conviction does not disqualify, but hiding it from investors creates a separate problem.

How issuers screen for bad actor problems in practice

Because the reasonable care exception rewards documented diligence, the workflow below is what most well-advised issuers run before opening a raise:

1. Build the covered-person list. Identify every director, executive officer, general partner, managing member, 20% owner, promoter, and paid solicitor connected to the offering. Do this early — cap-table changes and new hires can add covered persons mid-raise.
2. Send bad-actor questionnaires. Have each covered person certify, in writing, whether any disqualifying event applies, covering the full look-back windows.
3. Corroborate with public-record checks. Cross-check against SEC and FINRA disciplinary databases and relevant state regulator records rather than relying solely on self-certification.
4. Refresh before each sale. Disqualification is tested continuously through the offering period, so issuers commonly re-confirm status at closings and when a new covered person joins.
5. Document everything. The reasonable care exception lives or dies on the paper trail. Keep the questionnaires, the checks, and the dates.

Why this matters for marketing a raise

A bad-actor problem is not a marketing issue, but it becomes one the moment it surfaces mid-campaign. A disqualification discovered after solicitation has begun can force an issuer to halt outreach, unwind commitments, or restructure the covered-person group — all while paid acquisition, PR, and investor interest are in motion. Clearing the bad-actor check before the funnel goes live protects the marketing spend that follows.

Growth Turbine has provided marketing support across more than $490M in aggregate issuer-reported totals and 200+ campaigns supported spanning Reg-CF, Reg-D 506(c), Reg-A+, and tokenized securities offerings across 23+ crowdfunding platforms and 25+ industries. That experience is on the acquisition side — the compliance determination itself belongs with your securities counsel — but we consistently see raises run more smoothly when the eligibility questions, including bad-actor screening and state blue-sky obligations, are settled before the campaign launches.

Frequently asked questions

Does a bad actor disqualification apply to Reg-CF and Reg-A, or only Reg-D?

It applies to all three. Reg-D uses Rule 506(d), Regulation A uses Rule 262, and Regulation Crowdfunding uses Rule 503. The covered persons and disqualifying events are substantially parallel across the exemptions.

Can a 20% investor disqualify my whole offering?

Yes. A beneficial owner of 20% or more of the issuer's outstanding voting equity, measured by voting power, is a covered person. A disqualifying event affecting that owner can taint the offering even if the founders and officers are clean.

What is the reasonable care exception?

An issuer is not disqualified if it establishes that it did not know, and in the exercise of reasonable care could not have known, of a covered person's disqualifying event. Establishing it generally requires a documented factual inquiry — typically bad-actor questionnaires plus public-record checks — completed before the raise.

Do events before September 23, 2013 disqualify an issuer?

No. Events that occurred before the rule's effective date do not trigger disqualification, but under Rule 506(e) the issuer must disclose them to investors a reasonable time before sale.

Can a disqualification be waived?

Sometimes. The SEC may grant a waiver upon a showing of good cause, and a state regulator that issued a triggering order may waive that order. Waivers are discretionary and depend on the specific facts; consult counsel to assess whether one is realistic.

Clear the eligibility check, then build the funnel

Bad-actor screening is a legal determination best made with qualified securities counsel before you spend a dollar on solicitation. Once eligibility is settled, executing the raise becomes an investor-acquisition problem. If you are planning a Reg-D offering, our Reg-D equity crowdfunding marketing agency builds the acquisition funnel that turns a compliant offering into committed capital; issuers raising under the crowdfunding or Regulation A exemptions can start with our Reg-CF and Reg-A+ marketing services, and review the platforms we work across. Contact us once your covered-person list is clean and you are ready to market.

Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute legal, financial, or investment advice. Always consult with qualified legal counsel and financial advisors before launching a capital raise.