Angel Capital Association Weighs in on Proposed "Bad Actor" Rule

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Previously, I discussed the impact that the proposed "bad actor" rule will have on angel financings and offerings of interests in private investment funds. By prohibiting the use of Rule 506 of Regulation D in connection with any offering which is associated with or promoted by a person which has committed certain enumerated bad acts, the rule will effectively impose a due diligence requirement on issuers requiring them to ensure that anyone associated with the issuer (i.e. directors, officers, greater than 10% shareholders) and any promoters of the offering have not engaged in prior misconduct. In the event that the issuer later turns out to be associated with one of these bad actors, the issuer would lose its private placement exemption and could be liable for selling an unregistered security, unless it could establish that it did not know, and in the exercise of reasonable care could not have known, that the disqualification existed. This requirement, I believe, will impose additional costs on startups and on private funds. It seems that the Angel Capital Association (ACA), in a recent letter to the SEC, has taken the same view.

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