What are Bad Actor Checks and why do I need them?

What are Bad Actor Checks and why do I need them?

Because you’re raising money using equity crowdfunding, your campaign is subject to SEC rules.  Under the SEC’s crowdfunding rules, there are certain rules that disqualify individuals from raising money using equity crowdfunding.  Most of these rules relate to securities related violations.

Bad Actor Checks (“BAC’s”) are the reports required to confirm that your company is qualified to raise money under the regulation.  The regulation requires StartEngine to collect these reports for every “covered person” involved in the crowdfunding campaign to ensure that the company is qualified under the regulation.

Who do I need them for?

Under the rules, Bad Actor Checks are required for every “covered person” involved in the campaign.  The SEC defines “covered persons” to include the following:

• The company issuing securities, including its predecessor entities and affiliated entities issuing securities;
• Directors, general partners, and managing members of the company;
• Executive officers of the company, and other officers of the company that participate in the offering;
• 20% beneficial owners of the company;
  • Any entities (LLC, C-Corp, etc.) owning >20% beneficial ownership of the issuer will also require Bad Actor Checks for all “covered persons” of the underlying entity
  • Promoters connected to the company;
  • Any person compensated for soliciting investors, including any directors, general partners and managing members of those solicitors; and
  • For pooled investment funds, the fund’s investment manager and its principals.
    
    

Below are some examples describing who would need a report in each scenario:

• John is the CEO and sole director of ABC, Inc.
  • ABC, Inc. and John need BAC’s
    
    
• John is the CEO and a director, and Jen is a director of ABC, Inc.
  • John, Jen, and ABC Inc. need BAC’s
    
    
• John is the CEO, Tim is an investor owning 25%, James is an investor owning 10% of ABC, Inc.
  • John, Tim, and ABC, Inc. need BAC’s
    
    
• John is CEO, XYZ Investments LLC owns 50%, of ABC, Inc.  Sara is the managing member of XYZ Investments LLC.
  • John, ABC, Inc., XYZ Investments LLC, and Sara need BAC’s

How do I order them?

Once you have submitted your campaign for StartEngine Review, our compliance officer will reach out to you from [e-mail] with further instructions on how to request and pay for your company's bad actor checks.

Please note that the checks are $250 each and payable prior to completion of the bad actor checks. Once the payment has been submitted, StartEngine will be able to run the bad actor checks.