Willful Blindness: The Rule 506 Securities Law Exemption and the New “Bad Actor” Rules


Entrepreneurs create jobs, but they generally don’t do it out of thin air. Usually, they need investors. These investors are generally very wealthy people who are 1) inherently private and 2) usually very busy doing wealthy person stuff. So imagine learning, after going through all the work of finding an investor, that the Congress and the Securities and Exchange Commission (SEC) want to make it harder to raise money, including in some cases requiring investors to respond to a checklist of private and probing questions to find out if they are or have been at any time within the last 10 years a “bad actor.”

If you haven’t had the chance to read the SEC’s proposed rules on “bad actors” disqualifying companies from using the Rule 506 securities law safe harbor exemption, you ought to. The proposed rules, if adopted, will fundamentally change Rule 506 offerings and the startup financing legal landscape.

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