What is the bad actor rule?

Covered persons include the issuer, its directors and officers taking part in the offering, general partners, owners of 20% of its voting equity, promoters, a pooled fund’s investment manager and anyone paid to solicit investors. Disqualifying events include convictions within ten years (five for the issuer itself), and some court injunctions, SEC orders and regulators’ bars within set periods. Events before September 23, 2013 do not disqualify but must be disclosed to investors in writing before a sale.

Say a fund’s paid placement agent was convicted of securities fraud in 2020 and the fund raises money in 2026. Six years is inside the ten-year window, so while that agent solicits for it, the fund cannot rely on Rule 506. Simple example. Terms vary by fund.

A fund that relies on Rule 506 can lose the exemption because of one disqualified person tied to its offering.