I often see Subscription Agreements asking the investor to promise she’s not a “bad actor.” This is unnecessary. The term “bad actor” comes from three sets of nearly indistinguishable rules:
- 17 CFR §230.506(d), which applies to Rule 506 offerings;
- 17 CFR §230.262, which applies to Regulation A offerings; and
- 17 CFR §227.503, which applies to Reg CF offerings.
In each case, the regulation provides that the issuer can’t use the exemption in question (Rule 506, Regulation A, or Reg CF) if the issuer or certain people affiliated with the issuer have violated certain laws.
Before going further, I note that these aren’t just any laws – they are laws about financial wrongdoing, mostly in the area of securities. Kidnappers are welcome to use Rule 506, for example, while ax murderers may find Regulation A especially useful even while still in prison.
Anyway.
Reg CF’s Rule 503 lists everyone whose bad acts we care about:
- The issuer;
- Any predecessor of the issuer;
- Any affiliated issuer;
- Any director, officer, general partner or managing member of the issuer;
- Any beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power;
- Any promoter connected with the issuer in any capacity at the time of filing, any offer after filing, or such sale;
- Any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with such sale of securities; and
- Any general partner, director, officer or managing member of any such solicitor.
Nowhere on that list do you see “investor.” The closest we come is “Any beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities,” but even there the calculation is based on voting power. In a Crowdfunding offering you wouldn’t give an investor 20% of the voting power, for reasons having nothing to do with the bad actor rules.
So it just doesn’t matter. This is one more thing we can pull out of Subscription Agreements.
I know some people will say “But we want to know anyway.” To me this is unconvincing. If you don’t ask about kidnapping you don’t need to ask about securities violations.
Questions? Let me know.