Bad Actor Rule 506(d): Who Is Covered, What Disqualifies

The bad actor rule, Rule 506(d), bars an issuer from using Rule 506 if the issuer or a covered person tied to the offering has a disqualifying event, such as a securities fraud conviction or certain regulator orders. Sponsors must check every covered person before selling. If you are the sponsor, we built DoorRaise to include a Rule 506(d) check in its sponsor background review.

Who is a covered person?

A covered person is the issuer or anyone tied to it in a way that Rule 506(d) lists. If any covered person has a disqualifying event, the whole offering loses Rule 506.

The covered group includes:

The issuer, its predecessors and affiliated issuers
Directors, executive officers, other officers who participate in the offering, general partners and managing members of the issuer
Anyone who beneficially owns 20% or more of the issuer's voting equity securities
Promoters connected with the issuer at the time of the sale
The investment manager of a pooled investment fund issuer
Anyone paid, directly or indirectly, to solicit purchasers, plus that person's own general partners, managing members, and participating directors and officers

The SEC's Rule 506(b) page notes that these offerings are subject to the bad actor provisions, and the Investor.gov Reg D page shows how Form D filings can be looked up on EDGAR.

That last category is why a capital raiser or finder can create a problem for your entire offering. A person you pay to bring in investors becomes someone whose history you must check. This sits inside the wider real estate syndication process, and it is one of the first things to settle.

What events disqualify you?

The rule lists eight categories of disqualifying events, and the look-back period depends on the category. The table summarizes them. Your attorney should read the exact text in 17 CFR 230.506(d)(1) for the covered conduct in each.

Event	Look-back
Criminal convictions tied to securities, false SEC filings, or certain broker, dealer, adviser or underwriter business	10 years, or 5 years if the person is the issuer, a predecessor or an affiliated issuer
Court injunctions or restraining orders on the same kinds of conduct	Entered within 5 years
Final orders of state or federal regulators (securities, banking, insurance, CFTC, NCUA)	Order that bars covered activity and is in effect at the time of sale, or a fraud-based order entered within 10 years
Certain SEC orders under the Exchange Act or Advisers Act (registration suspension or revocation, limits, penny stock bars)	In effect at the time of sale
SEC cease-and-desist orders for scienter-based antifraud violations or Section 5	Entered within 5 years
Suspension or expulsion from a securities exchange or association (SRO) for conduct inconsistent with just and equitable principles of trade	No stated look-back; the rule speaks in the present tense, so confirm status as of the sale
Refusal, stop or Regulation A suspension orders on a registration or offering statement	Within 5 years, or a related investigation or proceeding pending at the time of sale
U.S. Postal Service false representation orders, or a TRO or preliminary injunction over alleged mail fraud	Within 5 years, or in effect at the time of sale

The reference point for the look-back is the date of the sale. That matters for a continuing raise, because your answer on the first closing date may not hold at the second closing.

What are the exceptions and relief options?

Rule 506(d)(2) gives four ways around a disqualifying event, and each has conditions. They are not a substitute for checking.

Pre-2013 events. An event that occurred before September 23, 2013 does not disqualify. But Rule 506(e) requires a written description of it to each purchaser a reasonable time before sale.
SEC waiver. The SEC can find good cause that denying the exemption is not necessary. Waivers are case-specific.
Written advice from a court or regulator. If the court or regulator that issued the order advises in writing before the sale that disqualification should not arise, it does not.
Reasonable care. If the issuer shows it did not know, and with reasonable care could not have known, of the disqualification, it can still rely on Rule 506. The rule's instructions say this requires a factual inquiry suited to the circumstances. The SEC set no safe harbor, and law firm commentary on the 2013 adoption suggests inquiry in a continuous offering should be updated over time (see the Foley Hoag alert).

The reasonable-care exception is only as good as your records. If you cannot show what you asked and who answered, it is hard to rely on.

How do you check for bad actors?

Run a written process with the same steps every time. The goal is a file that shows your factual inquiry, in proportion to the offering.

List every covered person. Include officers, managing members, 20% owners, promoters and anyone you pay to solicit investors.
Collect a questionnaire from each. It should be signed and dated and ask about each disqualifying category.
Run independent checks. Search public regulator databases (for example the SEC, FINRA and state securities regulators) and court records where it makes sense. No single database is a complete bad actor search.
Bring counsel in on any hit. Your attorney decides whether it is a disqualifying event, whether an exception applies, and whether disclosure is needed.
Update the check. Re-run it if the team changes, a new solicitor is added, or before additional closings in a continuous raise.
Keep the file. Save questionnaires, search results and dates.

Form D asks the issuer to certify that the offering is not disqualified, so the answer you give there should rest on this file. See Form D filing.

A worked example (illustrative)

Take a sponsor raising $2,500,000 for a 30-unit building, with a sale on November 16, 2026. The facts below are made up for illustration.

The managing member had a covered criminal conviction in 2019. The sale date is about seven years later. For a person who is not the issuer, the look-back is 10 years, so the conviction would still count. The issuer's own look-back is 5 years, so a 2019 conviction of the issuer itself would have aged out by 2024, but this person is a managing member, not the issuer.
A court entered a covered injunction against a promoter in March 2022. The look-back for injunctions is 5 years, so it runs to March 2027 and would still be live at a November 2026 sale.
An investor wants to put in $600,000. That is 600,000 / 2,500,000 = 24% of the raise. If the investor receives voting equity and holds 20% or more of the issuer's voting equity, they would be a covered person. Whether the investor does depends on the operating agreement, since many investor units are non-voting.

The takeaway is that a quiet check at the start is much cheaper than discovering any of these after the money is in. All three scenarios would go to counsel.

Our take

Our take: the bad actor check is the cheapest compliance step in a Rule 506 raise and the one most often treated as a formality. Do it first, before legal fees (our 506(b) vs 506(c) guide covers the next decision), and do it for everyone who touches the raise.

We think sponsors should ask uncomfortable questions of their partners early and in writing. A partner who stays silent about a past order can sink the offering for everyone, including the investors who already wired money.

We also think paid solicitors are the most overlooked group. If someone is paid per investor, they are a covered person, and their history becomes your problem.

Trade-offs and who this is not for

A thorough check costs a bit of time and can produce uncomfortable conversations, but it protects the exemption. It is not a guarantee, because databases are incomplete and the reasonable-care standard is about facts.

Not a task you can hand to a software checkbox. Questionnaires and searches feed your file, and counsel decides what a hit means.
Not a one-time step for continuous raises. Update your inquiry as the raise goes on.
Not only for large sponsors. The rule applies to a first-time sponsor raising $500,000 just the same.
Not a reason to panic over every old event. Look-backs and exceptions are specific. A pre-2013 event, for instance, is disclosed rather than disqualifying.

A common mistake is assuming the rule covers only the person who signs the paperwork. It reaches 20% voting owners, promoters and paid solicitors, so list them all.

How DoorRaise fits in

DoorRaise helps sponsors raise equity for apartment buildings with 5+ units under Rule 506(b) or 506(c). We are software, legal document preparation, escrow coordination and verification services, not a law firm, broker-dealer, investment adviser, funding portal, bank or escrow agent. "Verified" on a DoorRaise deal means we checked specific listed facts, including sponsor identity and background with a Rule 506(d) check, the purchase contract, the title commitment and the lender term sheet. It does not mean an investment is good.

Those checks sit in the $5,000 closing fee, which is paid from the funds raised and only if the deal closes. That fee also covers attorney review of the offering documents and the Form D filing. The $500 setup fee covers the LLC, investor documents, escrow and accreditation checks, and the $3,500 yearly fee covers bookkeeping, taxes and K-1s. We take 0% of the raise or profits. Your attorney still decides who counts as a covered person and what to do about any findings.

Ready to raise? Create your free sponsor page or see pricing.

FAQ

Does the bad actor rule apply to both 506(b) and 506(c)?

Yes, it applies to Rule 506 offerings of both kinds. Rule 504 offerings are covered too: Rule 504(b)(3) incorporates the Rule 506(d) standards and the Rule 506(e) disclosure duty. See what Regulation D is for how the rules fit together.

Does my property manager count as a covered person?

Only if they fall into a covered category, for example if they are paid to solicit investors or are an officer participating in the offering. A property manager who only runs the building is generally outside the list, but ask your attorney.

What if I find a problem after I start raising?

Tell your attorney right away and stop selling until you understand the effect. Whether an exception such as a waiver or written regulator advice applies is a question for counsel.

Does filing Form D mean I have passed the bad actor check?

No. Form D asks you to certify that the offering is not disqualified, but the filing does not replace your own inquiry or your records.

Do events from before 2013 matter?

They do not disqualify, but Rule 506(e) requires written disclosure to each purchaser a reasonable time before sale. Missing disclosure may be excused if you establish you did not know and, with reasonable care, could not have known.

Can an investor be a covered person?

Yes, if they beneficially own 20% or more of the issuer's voting equity. Many investor units carry no vote, so this depends on your operating agreement.

Sources

This article is general information, not legal, tax or investment advice. Talk to a securities attorney about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.