A threat to early-stage offerings: the Bad Actor disqualification
Reg A, Reg CF, and Rule 506 of Reg D require that no Bad Actors participate in the offering. Allowing one disqualifies you from the exemption — and going forward anyway can create serious legal liability.
Why Bad Actor compliance matters
A securities offering is disqualified from relying on Rule 506 of Reg D, Regulation Crowdfunding, or Regulation A if the issuer or specified covered persons are considered Bad Actors. Intermediaries must also run background checks to identify Bad Actors before granting platform access.
The acts that qualify a Bad Actor cover eight classes of disqualifying events — including civil and criminal judgments, administrative orders from state and federal agencies, and orders from regulatory organizations.
The people subject to disqualification include the issuing company and its officers, directors, major shareholders, and parties paid to solicit or promote the offering.
How do you avoid a Bad Actor disqualification?
There is no single database to check. But if you take reasonable care through a factual inquiry into every covered person, you remain eligible to rely on the SEC's exemptions — even if a Bad Actor later turns out to be involved. A KoreVerify Bad Actor Report constitutes that factual inquiry.
Order a Bad Actor ReportWho is subject to the disqualification
Under the SEC's rules, the following people and entities are considered covered persons for offerings under Rule 506 of Reg D, Reg CF, or Reg A.
Rules differ slightly across exemptions: all officers are included under crowdfunding, and pooled investment funds may not use Reg CF or Reg A. The rules also apply to broker-dealers and other intermediaries.
- The issuer and any predecessor or affiliated issuer
- Directors, general partners, and managing members
- Executive officers and officers participating in the offering
- Any 20% beneficial owner of the issuer
- Promoters connected with founding the issuer
- Investment managers and principals of pooled funds
- Compensated solicitors of purchasers
- Directors, officers, and partners of any compensated solicitor
Eight classes of disqualifying events
Each class carries its own look-back period from the start of the securities offering.
Criminal Convictions
Felonies or misdemeanors connected to the purchase or sale of a security, false filings, or the conduct of a regulated securities business.
Court Injunctions & Restraining Orders
Orders, judgments, or decrees that restrain or enjoin conduct in connection with the purchase or sale of securities.
Final Orders of Certain Regulators
Bars or fraud-based orders from state securities, banking, insurance, federal banking regulators, the CFTC, or the NCUA.
Commission Disciplinary Orders
SEC orders suspending or revoking registration, limiting activities, or barring association under the Exchange Act or Advisers Act.
Cease-and-Desist Orders
SEC orders to cease and desist from violations of federal anti-fraud provisions or Section 5 of the Securities Act.
SRO Suspension or Expulsion
Suspension, expulsion, or bar from a registered national securities exchange or association.
Stop Orders & Reg A Suspensions
Participation in a registration statement or Reg A offering that was subject to a refusal, stop, or suspension order.
USPS False Representation Orders
Postal Service false representation orders or related injunctions for schemes to obtain money by false representations.
What this service supports
- Background check against SEC disqualifying events
- State and federal agency order review
- Criminal judgment and conviction screening
- Reasonable care investigation of covered persons
- Proactive beneficial owner, officer & director checks pre-launch
- Easy-to-understand disqualification report
What's typically reviewed
- Officers, directors, and major shareholders
- Parties promoting or soliciting the offering
- Compensated finders and placement agents
- Securities intermediaries involved in issuance
How KoreVerify helps
We check each covered person against all known sources of disqualifying events and deliver an easy-to-understand report showing whether any events trigger disqualification.
Built for every stage of your raise
Prior to offering launch
Screen all covered persons before a Reg A, Reg CF, or Reg D offering goes live.
Ongoing & new covered persons
Re-check as transition issues arise or new officers and directors come onboard.
On-demand reasonable care
Fulfil the reasonable care obligation whenever a factual inquiry is required.
Avoid legal liabilities. Verify first.
Check potential officers and directors before you bring them onboard — and document your reasonable care.
Request a Bad Actor Report