Maybe You Should File That Form D After All?

As a lawyer who frequently works with entrepreneurs raising capital, we are often called on to assist with compliance with state and federal securities laws. For those who don’t know, when you sell a “security” in a private offering, you need to have exemptions from both state and federal registration requirements for offerings of securities. In case you were wondering, a “security” is any instrument that has a future value tied to the success of the enterprise (e.g. common or preferred stock, promissory notes (convertible or otherwise), or SAFEs).

While there are other exemptions available in certain situations, by far the most common exemptions used are those under Regulation D. The SEC’s fiscal 2023 report indicates that $2.7 trillion has been raised in Rule 506(b) offerings, with an additional $169 billion in Rule 506(c) offerings (using general solicitation and verification of accredited status of investors), and $258 million in Rule 504 offerings.

Utilizing Regulation D exemptions technically requires the filing of a Form D with the SEC and, often, with the states where investors are located. However, many securities lawyers for many years advised their clients that it wasn’t important to make such filings because the likelihood of SEC or state enforcement action was very low. Further, SEC guidance (Question 257.07) specifically indicated that, while Rule 503(a) requires the filing of a Form D within 15 days of the first sale, and there are consequences (in Rule 507) to the failure to make such a filing, a filing is not a condition to availability of an exemption. To put it another way – you don’t “use it or lose it” when it comes to the failure to file a Form D and the qualification for the exemption.

After the passage of the National Securities Markets Improvement Act in 1997 Rule 506 offerings of “covered securities” became the primary exemption utilized by companies raising capital. As electronic filings have become the norm, companies wanting to comply with Regulation D have more consistently filed a Form D in connection with their private offerings which made it easy to file a “coordinated copy” of that Form D with the states where investors are located, which is often required for compliance with state “blue sky” laws.  

With all that as background, late last year we saw another reason to timely file a Form D. The SEC announced last December that it had brought charges against two private companies for failure to timely file a Form D. These issuers agreed to pay civil penalties of $175,000 and $195,000 and to cease and desist from violating the Form D filing requirement. It is important to note that these companies, who had used general solicitation to raise tens to hundreds of millions of dollars, were also being investigated and subject to enforcement regarding other aspects of their offering activities. This might mean that it will take more significant unlawful activity than just a failure to file a Form D to get the attention of federal and state regulators. 

Sure, filing a Form D and complying with state blue sky laws will take some effort and you’ll probably even have to talk to your lawyer… However, in addition to helping you avoid enforcement action and potential civil penalties, complying with the exemption requirements will also lay the foundation for good securities compliance, which will make representations in a later financing and, ultimately, a liquidity event, easier to execute without the need for a bunch of cleanup work that will undoubtedly take more time, effort and cost than getting it right in the first place.