Definition
Bad Actor Check
Diligence confirming that nobody involved in the offering has a disqualifying securities violation.
A bad actor check is the diligence required by Rule 506(d), which disqualifies an offering from the Reg D exemption if any covered person has a relevant disqualifying event, such as a criminal conviction, court injunction, regulatory bar or SEC order, generally within a look-back period. Covered persons extend beyond the issuer to its directors, executive officers, managing members, promoters, and any 20% beneficial owner, so a single disqualified participant can invalidate the exemption for the whole raise. Issuers are expected to exercise reasonable care, which in practice means questionnaires from each covered person plus a records check, documented and refreshed for each offering. Discovering a disqualification after the close is far more expensive than the check.