Fund Manager
Bad Actor Disqualification Under Rule 506, for SPVs
Bad Actor Disqualification Under Rule 506, for SPVs
Addhyan Negi
·
Rule 506(d) is the SEC's bad actor disqualification rule. If the issuer or another covered person has a listed criminal conviction, court order, or regulatory bar that occurred on or after September 23, 2013, the offering cannot rely on Rule 506(b) or Rule 506(c). That is the whole exemption, not one investor.
This is general information, not legal, tax, or investment advice. Map covered persons and events to the current text of 17 CFR 230.506 with counsel before any sale.
What Rule 506(d) bad actor disqualification does
Rule 506 of Regulation D is how U.S. SPVs and private funds commonly sell interests without Securities Act registration. The 506(b) versus 506(c) choice is about general solicitation and accredited-investor verification. Rule 506(d) sits on top of both. The current rule text states that "no exemption under this section shall be available for a sale of securities" if a covered person has a disqualifying event (17 CFR 230.506(d)(1)).
The SEC adopted paragraphs (d) and (e) to implement Section 926 of the Dodd-Frank Act. Staff's small-entity compliance guide (dated September 19, 2013; last reviewed December 5, 2013; fetched August 25, 2026) states that disqualification applies to events on or after September 23, 2013, the effective date. Events before that date are a disclosure problem under Rule 506(e), not an automatic bar.
Form D is not the diligence. The current Form D signature block requires the issuer to certify that, if it is claiming a Regulation D exemption, it is not disqualified under Rule 504(b)(3) or Rule 506(d) (SEC Form D, fetched August 25, 2026). The notice still has to go out after first sale. The 506(d) work has to be done before that certification.
Who is a covered person under Rule 506(d)
The covered-person list is in 17 CFR 230.506(d)(1). For an SPV or fund, read it as the people who can taint the issuer or the offering:
Covered person (rule text) | What that usually is on an SPV or fund |
|---|---|
The issuer, any predecessor, any affiliated issuer | The SPV LLC or fund limited partnership, plus prior entities and affiliates issuing in the same offering |
Directors, executive officers, other officers participating in the offering, general partners, managing members of the issuer | Managing member / GP, and any officer who is more than incidentally involved in the raise |
Beneficial owner of 20% or more of outstanding voting equity, calculated on voting power | A large LP. Voting power, not a single class and not economics alone |
Promoter connected with the issuer in any capacity at the time of the sale | Often the syndicate lead or sponsor who founded the vehicle |
Investment manager of a pooled-fund issuer, plus that manager's general partners, managing members, and participating directors/officers | The RIA or management company and its control people |
Anyone paid, directly or indirectly, to solicit purchasers, plus that solicitor's general partners, managing members, and participating directors/officers | Placement agents, finders, and their principals — registered or not |
The 20 percent test is voting power of the issuer's outstanding voting equity (SEC compliance guide, part 2). On a small SPV, one LP can cross that line. That LP is then a covered person for that sale, even if they never touch the subscription process.
"Participating in the offering," for officers who are not executive officers, is more than transitory or incidental involvement: due diligence, disclosure drafting, or communication with the issuer, prospective investors, or other offering participants (same guide).
"Promoter" follows Securities Act Rule 405 as the guide summarizes it: a person who takes the initiative in founding the issuer, or who, in connection with that founding, receives 10 percent or more of any class of issuer securities or 10 percent or more of the proceeds from the sale of any class of issuer securities (other than securities received solely as underwriting commissions or solely in exchange for property).
Affiliated-issuer events that occurred before the affiliation arose are not disqualifying if the affiliate does not control the issuer and is not under common control with the issuer by a third party that controlled the affiliate at the time of the events (17 CFR 230.506(d)(3)).
Which events disqualify a Rule 506 offering
Look-back is measured from the date of the event (the conviction, order, or bar), not the date of the underlying conduct (SEC guide, part 3). The current categories in 17 CFR 230.506(d)(1)(i)–(viii):
Disqualifying event | Look-back / duration in the current rule |
|---|---|
Felony or misdemeanor in connection with the purchase or sale of a security, a false filing with the Commission, or the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser, or paid solicitor | Ten years before the sale; five years for the issuer, its predecessors, and affiliated issuers |
Court order, judgment, or decree entered within five years that, at the time of sale, restrains or enjoins the same categories of conduct | Five years, and still in effect at sale |
Final order of a listed state securities, banking, or insurance regulator, a federal banking agency, the CFTC, or the NCUA that bars the person, or that is based on fraudulent, manipulative, or deceptive conduct | Bars: while they still bar. Fraud-based final orders: ten years before the sale |
SEC order under Exchange Act §15(b) or §15B(c), or Advisers Act §203(e) or (f), that suspends or revokes registration, limits activities, or bars association or penny-stock participation | While the order still prohibits or requires something |
SEC cease-and-desist order entered within five years that, at sale, orders the person to cease and desist from scienter-based antifraud provisions or from Securities Act §5 | Five years, and still in effect |
Suspension or expulsion from membership in, or from association with a member of, a registered national securities exchange or association (for example FINRA) for conduct inconsistent with just and equitable principles of trade | While the suspension, expulsion, or bar is in effect |
Filed a registration statement or Regulation A offering statement (as registrant, issuer, or named underwriter) that, within five years, was the subject of a refusal, stop, or Regulation A suspension order, or is in a pending proceeding to issue one | Five years, or while the proceeding is pending |
U.S. Postal Service false-representation order, or a TRO / preliminary injunction on alleged false-representation mail conduct | Five years for the order; while the TRO / injunction is in effect |
Injunctions and restraining orders that have expired or been lifted are not disqualifying even if they were entered inside five years (SEC guide). Bars are disqualifying only while they have continuing effect. Staff also states that censures and orders to pay civil money penalties, assuming the penalties are paid, are not themselves the SEC disciplinary-order trigger; a disqualification based on a suspension or limitation expires when that suspension or limitation expires.
A listed regulator's order can be "final" even if it is on appeal. No hearing need have occurred; a settlement counts as having been made after an opportunity for hearing (SEC guide, part 3).
Rule 506(e): events before September 23, 2013
Events before September 23, 2013 do not disqualify. Rule 506(e) requires the issuer to furnish each purchaser, a reasonable time prior to sale, a written description of any matters that would have triggered 506(d)(1) but occurred before that date. Failure to furnish that description timely makes Rule 506 unavailable unless the issuer establishes it did not know and, in the exercise of reasonable care, could not have known of the undisclosed matter (17 CFR 230.506(e)).
The Commission expects reasonable prominence in the mix of information given to investors (SEC guide, part 6).
Reasonable care, waivers, and the Form D file
Paragraph (d)(2) names four paths out: (i) the event was before September 23, 2013; (ii) the Commission determines, on a showing of good cause, that an exemption should not be denied; (iii) the court or regulator that entered the order advises in writing, before the sale, that disqualification should not arise; or (iv) the issuer establishes it did not know and, in the exercise of reasonable care, could not have known that a disqualification existed (17 CFR 230.506(d)(2)).
The instruction to (d)(2)(iv) is operational. An issuer will not be able to establish reasonable care unless it has made, in light of the circumstances, a factual inquiry into whether any disqualifications exist. Scope varies with the issuer and the other offering participants.
A practical file, before the first irrevocable subscription and before anyone signs Form D:
List covered persons for this sale: issuer, managing member or GP, officers who will participate, 20 percent voting holders, promoters, the investment manager and its principals, and anyone who will be paid to solicit, plus their GPs or managing members and participating officers.
Collect questionnaires. Where the person is not in the room, match public-record checks to the relationship. A new placement agent is not the founding GP.
Re-run the list when a new 20 percent holder, a new solicitor, or a new participating officer joins a continuing offering. Disqualification is tested at each sale — the rule is written "for a sale of securities" and several clauses say "at the time of such sale."
If a pre-September 23, 2013 event exists, draft the 506(e) disclosure and deliver it a reasonable time before sale.
Keep the questionnaires with the Form D workpapers. Item 3 related persons and Item 12 sales compensation are not the full 506(d) list, but they should be consistent with it.
If a disqualifying event occurs while an offering is underway, sales before the event are not retroactively tainted; sales after it cannot rely on Rule 506 unless a waiver or removal applies, or reasonable care covers a then-unknown event (SEC guide, part 7). Events that existed at commencement but are discovered later trigger disqualification or a 506(e) disclosure obligation for later sales, subject to that same reasonable-care exception.
SPV versus committed fund
How to set up an SPV is the formation path. Rule 506(d) is the same rule on an SPV as on a fund. The difference is who sits in each covered-person seat.
The SPV LLC is the issuer. The managing member is covered as managing member. The syndicate lead is often a promoter and, if they are the investment manager of a pooled vehicle, covered again in that capacity. A 20 percent member of a small SPV is covered. A finder paid a success fee is a compensated solicitor whether or not they are a broker-dealer; their principals are covered too.
Do not treat a prior fund's questionnaire as covering a new SPV. The issuer changed.
Does Rule 506(d) apply to both 506(b) and 506(c)?
Yes. 17 CFR 230.506(d) applies to "this section," which is Rule 506. The SEC compliance guide states that an offering is disqualified from relying on Rule 506(b) and 506(c) if a covered person has a relevant event on or after September 23, 2013.
Does listing someone on Form D Item 3 finish the 506(d) check?
No. Item 3 asks for executive officers, directors (and equivalents such as general partners and managing members), and promoters. Covered persons also include 20 percent voting owners, the investment manager of a pooled fund and its principals, and compensated solicitors and their principals. Item 12 captures sales compensation; it still is not the diligence.
What if the GP discovers a bad actor after the first close?
The SEC guide states that sales made before a new disqualifying event are not affected, and that events existing at commencement but discovered later trigger disqualification or a 506(e) disclosure obligation for later sales, subject to reasonable care. Options the rule itself names include a Commission waiver, a writing from the entering authority, or ending the person's participation. That is a counsel call, not a form tweak.
Rule 506(d) is the SEC's bad actor disqualification rule. If the issuer or another covered person has a listed criminal conviction, court order, or regulatory bar that occurred on or after September 23, 2013, the offering cannot rely on Rule 506(b) or Rule 506(c). That is the whole exemption, not one investor.
This is general information, not legal, tax, or investment advice. Map covered persons and events to the current text of 17 CFR 230.506 with counsel before any sale.
What Rule 506(d) bad actor disqualification does
Rule 506 of Regulation D is how U.S. SPVs and private funds commonly sell interests without Securities Act registration. The 506(b) versus 506(c) choice is about general solicitation and accredited-investor verification. Rule 506(d) sits on top of both. The current rule text states that "no exemption under this section shall be available for a sale of securities" if a covered person has a disqualifying event (17 CFR 230.506(d)(1)).
The SEC adopted paragraphs (d) and (e) to implement Section 926 of the Dodd-Frank Act. Staff's small-entity compliance guide (dated September 19, 2013; last reviewed December 5, 2013; fetched August 25, 2026) states that disqualification applies to events on or after September 23, 2013, the effective date. Events before that date are a disclosure problem under Rule 506(e), not an automatic bar.
Form D is not the diligence. The current Form D signature block requires the issuer to certify that, if it is claiming a Regulation D exemption, it is not disqualified under Rule 504(b)(3) or Rule 506(d) (SEC Form D, fetched August 25, 2026). The notice still has to go out after first sale. The 506(d) work has to be done before that certification.
Who is a covered person under Rule 506(d)
The covered-person list is in 17 CFR 230.506(d)(1). For an SPV or fund, read it as the people who can taint the issuer or the offering:
Covered person (rule text) | What that usually is on an SPV or fund |
|---|---|
The issuer, any predecessor, any affiliated issuer | The SPV LLC or fund limited partnership, plus prior entities and affiliates issuing in the same offering |
Directors, executive officers, other officers participating in the offering, general partners, managing members of the issuer | Managing member / GP, and any officer who is more than incidentally involved in the raise |
Beneficial owner of 20% or more of outstanding voting equity, calculated on voting power | A large LP. Voting power, not a single class and not economics alone |
Promoter connected with the issuer in any capacity at the time of the sale | Often the syndicate lead or sponsor who founded the vehicle |
Investment manager of a pooled-fund issuer, plus that manager's general partners, managing members, and participating directors/officers | The RIA or management company and its control people |
Anyone paid, directly or indirectly, to solicit purchasers, plus that solicitor's general partners, managing members, and participating directors/officers | Placement agents, finders, and their principals — registered or not |
The 20 percent test is voting power of the issuer's outstanding voting equity (SEC compliance guide, part 2). On a small SPV, one LP can cross that line. That LP is then a covered person for that sale, even if they never touch the subscription process.
"Participating in the offering," for officers who are not executive officers, is more than transitory or incidental involvement: due diligence, disclosure drafting, or communication with the issuer, prospective investors, or other offering participants (same guide).
"Promoter" follows Securities Act Rule 405 as the guide summarizes it: a person who takes the initiative in founding the issuer, or who, in connection with that founding, receives 10 percent or more of any class of issuer securities or 10 percent or more of the proceeds from the sale of any class of issuer securities (other than securities received solely as underwriting commissions or solely in exchange for property).
Affiliated-issuer events that occurred before the affiliation arose are not disqualifying if the affiliate does not control the issuer and is not under common control with the issuer by a third party that controlled the affiliate at the time of the events (17 CFR 230.506(d)(3)).
Which events disqualify a Rule 506 offering
Look-back is measured from the date of the event (the conviction, order, or bar), not the date of the underlying conduct (SEC guide, part 3). The current categories in 17 CFR 230.506(d)(1)(i)–(viii):
Disqualifying event | Look-back / duration in the current rule |
|---|---|
Felony or misdemeanor in connection with the purchase or sale of a security, a false filing with the Commission, or the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser, or paid solicitor | Ten years before the sale; five years for the issuer, its predecessors, and affiliated issuers |
Court order, judgment, or decree entered within five years that, at the time of sale, restrains or enjoins the same categories of conduct | Five years, and still in effect at sale |
Final order of a listed state securities, banking, or insurance regulator, a federal banking agency, the CFTC, or the NCUA that bars the person, or that is based on fraudulent, manipulative, or deceptive conduct | Bars: while they still bar. Fraud-based final orders: ten years before the sale |
SEC order under Exchange Act §15(b) or §15B(c), or Advisers Act §203(e) or (f), that suspends or revokes registration, limits activities, or bars association or penny-stock participation | While the order still prohibits or requires something |
SEC cease-and-desist order entered within five years that, at sale, orders the person to cease and desist from scienter-based antifraud provisions or from Securities Act §5 | Five years, and still in effect |
Suspension or expulsion from membership in, or from association with a member of, a registered national securities exchange or association (for example FINRA) for conduct inconsistent with just and equitable principles of trade | While the suspension, expulsion, or bar is in effect |
Filed a registration statement or Regulation A offering statement (as registrant, issuer, or named underwriter) that, within five years, was the subject of a refusal, stop, or Regulation A suspension order, or is in a pending proceeding to issue one | Five years, or while the proceeding is pending |
U.S. Postal Service false-representation order, or a TRO / preliminary injunction on alleged false-representation mail conduct | Five years for the order; while the TRO / injunction is in effect |
Injunctions and restraining orders that have expired or been lifted are not disqualifying even if they were entered inside five years (SEC guide). Bars are disqualifying only while they have continuing effect. Staff also states that censures and orders to pay civil money penalties, assuming the penalties are paid, are not themselves the SEC disciplinary-order trigger; a disqualification based on a suspension or limitation expires when that suspension or limitation expires.
A listed regulator's order can be "final" even if it is on appeal. No hearing need have occurred; a settlement counts as having been made after an opportunity for hearing (SEC guide, part 3).
Rule 506(e): events before September 23, 2013
Events before September 23, 2013 do not disqualify. Rule 506(e) requires the issuer to furnish each purchaser, a reasonable time prior to sale, a written description of any matters that would have triggered 506(d)(1) but occurred before that date. Failure to furnish that description timely makes Rule 506 unavailable unless the issuer establishes it did not know and, in the exercise of reasonable care, could not have known of the undisclosed matter (17 CFR 230.506(e)).
The Commission expects reasonable prominence in the mix of information given to investors (SEC guide, part 6).
Reasonable care, waivers, and the Form D file
Paragraph (d)(2) names four paths out: (i) the event was before September 23, 2013; (ii) the Commission determines, on a showing of good cause, that an exemption should not be denied; (iii) the court or regulator that entered the order advises in writing, before the sale, that disqualification should not arise; or (iv) the issuer establishes it did not know and, in the exercise of reasonable care, could not have known that a disqualification existed (17 CFR 230.506(d)(2)).
The instruction to (d)(2)(iv) is operational. An issuer will not be able to establish reasonable care unless it has made, in light of the circumstances, a factual inquiry into whether any disqualifications exist. Scope varies with the issuer and the other offering participants.
A practical file, before the first irrevocable subscription and before anyone signs Form D:
List covered persons for this sale: issuer, managing member or GP, officers who will participate, 20 percent voting holders, promoters, the investment manager and its principals, and anyone who will be paid to solicit, plus their GPs or managing members and participating officers.
Collect questionnaires. Where the person is not in the room, match public-record checks to the relationship. A new placement agent is not the founding GP.
Re-run the list when a new 20 percent holder, a new solicitor, or a new participating officer joins a continuing offering. Disqualification is tested at each sale — the rule is written "for a sale of securities" and several clauses say "at the time of such sale."
If a pre-September 23, 2013 event exists, draft the 506(e) disclosure and deliver it a reasonable time before sale.
Keep the questionnaires with the Form D workpapers. Item 3 related persons and Item 12 sales compensation are not the full 506(d) list, but they should be consistent with it.
If a disqualifying event occurs while an offering is underway, sales before the event are not retroactively tainted; sales after it cannot rely on Rule 506 unless a waiver or removal applies, or reasonable care covers a then-unknown event (SEC guide, part 7). Events that existed at commencement but are discovered later trigger disqualification or a 506(e) disclosure obligation for later sales, subject to that same reasonable-care exception.
SPV versus committed fund
How to set up an SPV is the formation path. Rule 506(d) is the same rule on an SPV as on a fund. The difference is who sits in each covered-person seat.
The SPV LLC is the issuer. The managing member is covered as managing member. The syndicate lead is often a promoter and, if they are the investment manager of a pooled vehicle, covered again in that capacity. A 20 percent member of a small SPV is covered. A finder paid a success fee is a compensated solicitor whether or not they are a broker-dealer; their principals are covered too.
Do not treat a prior fund's questionnaire as covering a new SPV. The issuer changed.
Does Rule 506(d) apply to both 506(b) and 506(c)?
Yes. 17 CFR 230.506(d) applies to "this section," which is Rule 506. The SEC compliance guide states that an offering is disqualified from relying on Rule 506(b) and 506(c) if a covered person has a relevant event on or after September 23, 2013.
Does listing someone on Form D Item 3 finish the 506(d) check?
No. Item 3 asks for executive officers, directors (and equivalents such as general partners and managing members), and promoters. Covered persons also include 20 percent voting owners, the investment manager of a pooled fund and its principals, and compensated solicitors and their principals. Item 12 captures sales compensation; it still is not the diligence.
What if the GP discovers a bad actor after the first close?
The SEC guide states that sales made before a new disqualifying event are not affected, and that events existing at commencement but discovered later trigger disqualification or a 506(e) disclosure obligation for later sales, subject to reasonable care. Options the rule itself names include a Commission waiver, a writing from the entering authority, or ending the person's participation. That is a counsel call, not a form tweak.
Addhyan Negi
Director of Marketing, Allocations
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Allocations secondary market is operated through Allocations Securities, LLC dba AllocationsX, member FINRA/SIPC. Check this firm on FINRA BrokerCheck. Allocations Securities, LLC is a wholly owned subsidiary of Allocations, Inc.
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Allocations secondary market is operated through Allocations Securities, LLC dba AllocationsX, member FINRA/SIPC. Check this firm on FINRA BrokerCheck. Allocations Securities, LLC is a wholly owned subsidiary of Allocations, Inc.
Copyright © Allocations Inc
Allocations secondary market is operated through Allocations Securities, LLC dba AllocationsX, member FINRA/SIPC. Check this firm on FINRA BrokerCheck. Allocations Securities, LLC is a wholly owned subsidiary of Allocations, Inc.
Copyright © Allocations Inc