A Connecticut man and his company have agreed to settle SEC charges that they misled investors in a day trading fund and in funds tied to companies not yet public. The SEC filed the settled action on October 29, 2026, and according to its litigation release, both agreed to final judgments, subject to court approval, that would permanently enjoin them from violating federal antifraud provisions. The case shows where bad actor disqualification begins. Once a court enters an injunction like that, Rule 506(d) treats the person named as a bad actor in any Rule 506 offering where that person holds a covered role.
The rule reaches well beyond the sponsor, to its managers, its larger owners and anyone paid to bring in investors. One disqualifying event for any of them takes the exemption away from sales made while that person is involved. An issuer that missed the event has one defense, reasonable care, which rests on a factual inquiry it can prove. A sponsor should therefore run a dated bad actor check on every covered person before each raise, keep it in the offering file, and repeat it whenever the people around the deal change. The check sits near the top of the 506(c) capital raise checklist, and it applies equally to a Rule 506(b) raise.
Who Counts as a Covered Person Under Rule 506(d)
The SEC's small entity compliance guide on bad actor disqualification sorts covered persons into seven groups. In a syndication, each maps onto people a sponsor knows by name.
- The issuer, its predecessors and any affiliated issuer in the same offering, which usually means the deal entity.
- Directors, general partners and managing members, usually the sponsor's managing member entity.
- Executive officers, and other officers who take part in the offering.
- Anyone who beneficially owns 20 percent or more of the voting equity, measured by voting power.
- Promoters connected with the issuer.
- For a pooled investment fund, its investment manager and that manager's principals.
- Anyone paid to solicit investors, with that firm's managers and participating officers.
Three answers in the SEC staff's Compliance and Disclosure Interpretations catch sponsors out. They are staff guidance, not rules. A paid solicitor is covered whether or not it is a registered broker, so an unregistered finder paid for introductions counts (Question 260.17). An investor who reaches 20 percent of the voting power becomes covered for later sales in the offering (Question 260.28). For a paid solicitor's officers, taking part covers more than soliciting, including due diligence, preparing offering materials and speaking with investors, if the work is more than incidental (Question 260.19). Administrative tasks such as wiring funds or bookkeeping generally do not count.
The Events That Trigger Bad Actor Disqualification
The text of Rule 506 lists eight kinds of event in paragraph (d)(1). Most carry a look back period, which runs from the date of the conviction or order rather than the conduct behind it. Criminal convictions tied to securities, false SEC filings or the business of a broker, adviser or paid solicitor count for ten years, or five for the issuer and its affiliates. Court injunctions on the same subjects count for five years after entry, and only while in effect. Final orders of state securities, banking and insurance regulators and certain federal agencies count while a bar lasts, or for ten years when based on fraud.
The SEC's own orders work the same way. A suspension or limit on a broker's or adviser's registration counts while it lasts. A cease and desist order counts for five years if it concerns Section 5 of the Securities Act or an antifraud provision that requires intent. Suspension or expulsion by a self regulatory organization such as FINRA, an SEC stop order and a U.S. Postal Service false representation order complete the list.
The limits matter as much as the list. According to the SEC's guide, an SEC censure or a civil penalty already paid does not disqualify. A lifted injunction no longer counts, and a settled regulatory order still counts as a final order. The staff has said that convictions and orders from outside the United States do not trigger the rule (Question 260.20). Events before September 23, 2013, when the rule took effect, do not disqualify. Rule 506(e) instead requires the issuer to describe them in writing to each purchaser a reasonable time before the sale.
Reasonable Care and the Record Behind a Bad Actor Check
Rule 506(d)(2)(iv) excuses an issuer that did not know, and with reasonable care could not have known, that a disqualification existed. Its instruction adds that reasonable care requires a factual inquiry. In Securities Act Release No. 9414, which adopted the rule on July 10, 2013, the SEC said questionnaires or certifications, perhaps with contractual representations, may be sufficient in some circumstances. The staff has added that the defense can also cover an issuer that, despite reasonable care, missed that someone was a covered person (Question 260.23).
Questionnaires carry the weight because public databases are incomplete. The SEC's action lookup for individuals covers only SEC actions filed between October 1, 1995 and September 24, 2025, so the October 29 case would not appear in it. FINRA's BrokerCheck helps with a placement agent and its people, but it says nothing about a joint venture partner who was never registered. A sound file pairs a signed, dated questionnaire from each covered person with a note of the sources checked, the date and the result.
The file also supports a statement the sponsor already makes. Whoever signs Form D certifies that an issuer claiming a Regulation D exemption is not disqualified under Rule 506(d). A questionnaire file dated before the first sale is what stands behind that signature.
When the Bad Actor Check Is Due During a Raise
SEC staff say the inquiry applies any time an issuer is offering or selling under Rule 506 (Question 260.14). An issuer may rely on a covered person's promise to report new events. For an offering that stays open a long time, the staff expects updates through bring down certifications, negative consent letters and periodic database rechecks.
An event that surfaces mid raise does not reach back to earlier sales, but later sales cannot rely on Rule 506 until it is resolved. For a placement agent, the staff describes two fixes. The sponsor can end the engagement with no payment for later sales, or, if only the agent's officers are affected, remove them from covered roles (Question 260.15). The article on how a placement agent works in a sponsor's raise explains why that screening runs both ways. The SEC can also grant a waiver for good cause. No waiver is needed if the court or regulator states in writing that disqualification should not follow from its order.
What Sponsors Can Do Before Each Raise
The check works best as a routine fixed to the deal setup stage that the guide to raising capital for a real estate syndication walks through. The steps run in order.
- List every covered person for the deal by name and role, including every paid solicitor and its participating officers.
- Send each a dated questionnaire covering every event in Rule 506(d)(1), with an undertaking to report new events before the offering closes.
- Check the public sources that fit each person, record the date and result, and follow up on unclear answers.
- File the questionnaires and search notes with the offering documents before the first sale.
- Bring the file down before each later closing, and rerun it whenever a principal, owner or solicitor joins.
Raveum gives U.S. real estate sponsors a white label platform to run their raises, either on their own with Tier 1 Self-Managed or with Raveum's operations team on Tier 2 Assisted, where the sponsor's own counsel approves every document the team drafts. Every tier keeps an audit log and a document vault with auto filing for the questionnaires, and Tier 2 adds verification of the sponsor's business (KYB) and a review of each deal before it goes live, beside the sponsor's own check. See how the Raveum Sponsor Program works.
The Check That Stands Behind Every Sale
What the October 29 case shows is how quietly a disqualifying event can enter a raise, through an order against someone who later becomes a partner, a large investor or a paid introducer. Rule 506(d) does not ask whether the sponsor did anything wrong. It asks whether anyone in a covered role carries an event, and whether the sponsor looked. A dated questionnaire file, checked against public sources and brought down at each closing, answers both questions, and it belongs in the offering record the 506(c) capital raise checklist describes.
Frequently Asked Questions
What Is Bad Actor Disqualification Under Rule 506(d)
Bad actor disqualification is the SEC rule that bars an offering from relying on Rule 506(b) or Rule 506(c) if the issuer or another covered person has a listed disqualifying event, such as certain securities convictions, court injunctions or regulatory orders. It applies to events on or after September 23, 2013. Earlier events must instead be described in writing to purchasers under Rule 506(e).
Who Is a Covered Person in a Real Estate Syndication
Covered persons include the issuer and affiliated issuers in the offering, its directors, general partners and managing members, executive officers and other officers who take part in the offering, owners of 20 percent or more of the voting equity, promoters, and anyone paid to solicit investors along with that firm's officers and managers. In a syndication, that usually reaches the sponsor's managing member and its principals.
How Far Back Does the Bad Actor Look Back Period Go
It depends on the event. Criminal convictions count for ten years, or five for the issuer and its affiliates. Court injunctions and SEC cease and desist orders count for five years and only while in effect. State regulatory orders based on fraud count for ten years, and bars and suspensions count while they last. Each period runs from the date of the conviction or order.
How Often Should Bad Actor Questionnaires Be Updated
The rule sets no fixed schedule. SEC staff says the inquiry applies whenever an issuer is offering or selling under Rule 506, and that a continuous or long running offering needs periodic updates through bring down certifications, negative consent letters and rechecks of public databases. A practical pattern is fresh questionnaires for each new offering, updated before each closing and whenever a covered person joins.
What Happens If a Covered Person Has a Disqualifying Event During a Raise
Sales made before the event are not affected, but sales made afterward cannot rely on Rule 506 unless the disqualification is resolved, waived or excused by reasonable care. Without an exemption, those later sales would breach the Securities Act's registration requirement. Typical fixes include removing the person from the offering or ending a placement agent's engagement with no payment for later sales.
Can a Sponsor Get a Waiver of Bad Actor Disqualification
Yes, in two ways. The SEC can grant a waiver on a showing of good cause. Separately, no waiver is needed if the court or regulator that issued the order states in writing, before the sale, that Rule 506 disqualification should not arise from it. The duty to disclose events from before September 23, 2013 in writing cannot be waived.
This article is for general education only and is not legal, tax or investment advice. Securities and tax rules change and depend on each sponsor's facts, so work with qualified securities counsel and tax advisors before launching an offering. Real estate investments involve risk, including loss of capital, illiquidity and changes in property values. Offerings on Raveum are available to eligible investors only and are not open to the general public.
