Raising capital for your company or project typically involves preparing an SEC compliant securities offering to properly solicit investors and process investment subscriptions. There are a number of options available to execute an “exempt” offering such as SEC Regulation A, Regulation CF and Regulation D. One factor to consider when preparing an offering is executing appropriate Bad Actor checks on management and other key individuals involved with the issuer company.

An SEC Bad Actor refers to individuals or entities that have been involved in activities that violate securities laws or regulations, and who are considered unfit to participate in certain activities under the jurisdiction of the U.S. Securities and Exchange Commission (SEC). These bad actors are generally subject to disqualification from participating in certain securities offerings, including private placements or, in certain cases, a disclosure must be made informing investors of the bad actor activity (depending on the date of the activity and related enforcement action).

Under the SEC’s Bad Actor rules a bad actor is someone who:

1. Has a criminal conviction in connection with the purchase or sale of a security, or in a case involving fraud or deceit, within the last 10 years. This includes:

   • Felony convictions related to securities or fraud violations.
   • Convictions for any offense that involves fraud, deceit, or dishonesty.

2. Has been the subject of certain regulatory actions, such as:

   • Orders from the SEC or other regulatory bodies that prohibit or suspend the person’s participation in the securities business, or bars them from being an officer or director of a company.
   • Civil judicial actions related to securities law violations, such as actions brought by the SEC or state regulators, or regulatory bodies.

3. Has been the subject of certain orders from foreign regulators or courts, which have a similar effect to U.S. actions, such as being prohibited from participating in the securities industry.

4. Has been involved in certain events related to investment funds, including being part of an investment fund that has had certain legal violations or penalties.

The SEC considers these individuals or entities to be “bad actors” because they have shown a history of illegal or unethical behavior, and their involvement in securities offerings could pose a risk to investors.

If a person or entity is deemed a bad actor, they may be disqualified from relying on the exemption under Regulation D, which could impact their ability to raise capital in private securities offerings.

Red Rock Securities Law engages in bad actor checks and review of any potential historical bad actor activity prior to engaging a client as a courtesy to the client. This provides the client confidence in moving forward with the offering preparation process knowing all principals in the issuer company are cleared.

Interested in raising capital? Call us today to discuss! (720) 586-8610