Background checks

Who are "Covered Persons"?

Under the SEC’s rules, disqualifying events don’t just apply to issuers, they extend to a defined group of individuals and entities known as "Covered Persons." These are the people whose past actions can trigger the "Bad Actor" disqualification for a private offering. Covered persons typically include:

• Issuers and their predecessors or affiliated entities involved in the offering
• Directors, executive officers, and general partners of the issuer
• Investment managers and fund managers responsible for managing the offering or the assets
• Promoters, placement agents, and compensated solicitors who market or facilitate the offering
• Beneficial owners holding 20% or more of voting equity in the issuer
• Other individuals with significant influence over the offering, as determined under SEC guidance

What are Disqualifying Events?

Under the SEC’s "Bad Actor" rules, certain legal and regulatory actions, known as disqualifying events, can prevent an issuer from relying on key securities exemptions. These events generally involve serious misconduct related to securities, fraud, or regulatory compliance. In addition to identifying events that are explicitly disqualifying under SEC rules, background checks also review other legal and regulatory matters that may present material risk or disclosure considerations. Disqualifying events may include:

• Criminal convictions: felony or misdemeanor convictions in connection with the purchase or sale of securities, making false filings with the SEC, or arising from the conduct of business as a broker, dealer, municipal securities dealer, investment adviser, or paid solicitor.
• Final orders from regulatory authorities: orders issued by state securities commissions, state banking or insurance regulators, federal banking regulators, the U.S. Commodity Futures Trading Commission, or the National Credit Union Administration that bar a person from regulated activities or are based on violations involving fraudulent, manipulative, or deceptive conduct.
• SEC orders involving regulated persons: SEC orders issued under the Securities Exchange Act or the Investment Advisers Act that suspend or revoke registration, impose activity limitations, or bar association with regulated entities or participation in certain offerings.
• SEC cease-and-desist orders: orders requiring a person to cease and desist from violations of scienter-based anti-fraud provisions of federal securities laws or from violations of Section 5 of the Securities Act.
• Suspensions, expulsions, or bars from membership or association with registered national securities exchanges or associations, including FINRA, for conduct inconsistent with just and equitable principles of trade.
• SEC stop orders and offering suspensions: involvement in registration statements or Regulation A offerings that were subject to a refusal order, stop order, or order suspending an exemption.
• U.S. Postal Service false representation orders: USPS orders or related court actions involving schemes to obtain money or property through false representations using the mail.
• Other findings reviewed during background checks: not all adverse findings are automatically disqualifying under SEC rules. However, civil litigation, bankruptcy history, or other enforcement-related matters may still raise compliance, disclosure, or reputational concerns and are therefore reviewed as part of a comprehensive background check.

What else do North Capital Background Checks cover?

"Bad Acts" aren’t the only red flags that can derail an offering. North Capital’s background checks go above and beyond disqualification screening and include Social Security number traces, nationwide arrest searches, federal and county criminal records, sex offender registry checks, civil litigation, bankruptcy records, judgments, liens, and foreclosure searches, as well as international watch lists screening. Note: North Capital does not conduct credit checks.

Can I run a Background Check on an entity?

Yes, North Capital offers background checks on entities and suggests that all entities issuing securities complete a background check as part of their compliance and due diligence process.

Do North Capital Background Checks satisfy the Reasonable Care Exception?

There is no centralized repository for disqualification information, and determining whether a disqualifying event exists may require judgment based on specific facts and circumstances. Background checks depend on the availability and accuracy of public records, access to databases, and other practical limitations, including the possibility of human error. As a result, background checks cannot be guaranteed to uncover all events that may be disqualifying. In light of these limitations, the SEC provides a Reasonable Care Exception for offerings conducted under Rule 506 of Regulation D, Regulation A, and Regulation Crowdfunding. An issuer conducting an offering will not lose its ability to rely on the applicable exemption if it can demonstrate that it did not know, and through the exercise of reasonable care, could not have known, that a covered person was subject to a disqualifying event. North Capital’s background check process is designed to meet this "Reasonable Care" standard by conducting factual inquiries into the histories of the individual subjects, including investigations into potential disqualifying events.

What other services does North Capital provide?

Background checks are just one part of what North Capital offers. We are a leading provider of transaction technology and brokerage services for the primary issuance of exempt securities. Our services include agency brokerage, escrow, custody, secondary trading, accreditation verification, KYC/AML, compliance support, and more. To learn more about our full suite of services, visit North Capital’s Solutions page or contact us directly at sales@northcapital.com.