Navigating the S.E.C. Form D for Startups and Private Placements
The S.E.C. Form D plays a critical role for startups and companies engaging in private placements or non-public offering of securities. For example, when stock is offered to a select group of investors having a pre-existing relationship with the company. This article explores the significance of Form D, the legal provisions that govern it, and provides a detailed overview of how and when to file this crucial document.
What is Form D?
Form D, known as the “Notice of Exempt Offering of Securities”, is a filing required by the Securities and Exchange Commission (SEC) for companies selling securities under the SEC’s Regulation D (Reg D) exemptions.
Reg D exempts certain private placements from the registration requirements of the Securities Act, thereby allowing companies to raise capital without the compliance obligations related to a public offering.
These exemptions are particularly beneficial for startups and businesses, as they may reduce the regulatory burden and associated costs. However, to rely on these exemptions, compliance with the provisions of Reg D is crucial, and this is where Form D comes into play.
Form D may be filed for an appropriate securities offering to be recognized under the “safe harbor” of Reg D. Failure to file, or filing late, may potentially result in fines, disqualification from relying on Reg D exemptions in the future, and other legal consequences.
Regulation D was established under the Securities Act of 1933, often referred to as the “truth in securities” law. The objective of this act is to protect investors and prevent fraud in the sale of securities.
Legal Framework: Exemptions Under Regulation D
Regulation D offers certain exemptions from the registration requirements of the Securities Act. Some of these exemptions are Rule 504, Rule 506(b), and Rule 506(c).
Rule 504
Rule 504 allows for the sale of up to $10 million of securities in a 12-month period. It's available to private companies except investment companies and those subject to “bad actor” disqualification.
While general solicitation is typically prohibited under Rule 504, there may be exceptions under certain scenarios that require the public filing and delivery of a substantive disclosure document to investors, or when offered under a particular exemption allowing general solicitation to accredited investors.
Rule 506(b)
Rule 506(b) permits companies to raise an unlimited amount of money and sell securities to an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors.
Non-accredited investors receive disclosure documents similar to those used in registered offerings. Additionally, companies ensure that all non-accredited investors, either alone or with a purchaser representative, meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.
General solicitation and advertising to market the securities are prohibited under this exemption.
Rule 506(c)
Rule 506(c) is an exemption that allows companies to engage in general solicitation and advertising, provided that all purchasers in the offering are accredited investors, and the company takes reasonable steps to verify their accredited status.
Rule 506(c) may provide greater flexibility by allowing companies to publicly advertise their offerings, making it easier to reach a larger pool of potential investors. It does not impose any limits on the amount of capital that may be raised in an offering.
Regulation D, through Rules 504, 506(b), and 506(c), offer exemptions from the registration requirements of the Securities Act.
How to file Form D?
Form D is filed electronically through the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system. The process for filing Form D may involve filing Form ID, obtaining EDGAR access codes, and completing and submitting Form D. The SEC has also introduced EDGAR NEXT (new filing system). For more information, the following links may be helpful:
https://www.sec.gov/resources-small-businesses/exempt-offerings/filing-form-d-notice
https://www.workiva.com/blog/basics-edgar-next-and-steps-take-now
Public Knowledge
Once submitted, Form D filings are publicly available through the SEC's database. This means that information about the offering, including but not limited to, the amount raised and key personnel involved, may become publicly available.
Filing Deadline
The filing deadline for Form D is 15 days after the first sale of securities in the offering. Subsequently, if there are material changes to the information provided, an amendment to the Form D is filed.
Form D is filed electronically through the EDGAR or EDGAR NEXT system. The deadline is 15 days from the first sale of securities. After filing, the information included in Form D becomes publicly available.
State Law Compliance (“Blue Sky Laws”)
Form D also plays a role in complying with state securities laws, often referred to as “Blue Sky Laws”. Many states require notice filings based on the federal Form D. This means that in addition to filing with the SEC, Form D (or a similar state form) may be filed with each state where securities are offered or sold. Each state has its own filing requirements, deadlines, and fees.
Conclusion
Form D is a critical component of the regulatory framework governing exempt securities offerings. Understanding and properly filing Form D may be crucial for companies engaging in private placements or exempt offerings. By filing Form D, companies may fulfill their legal and compliance obligations and demonstrate transparency and accountability to regulators and potential investors.
THE AUTHOR IS NOT A SUBJECT MATTER EXPERT. THE INFORMATION PROVIDED IN THIS ARTICLE DOES NOT, AND IS NOT INTENDED TO, CONSTITUTE LEGAL ADVICE; AND IT IS NOT PROVIDED WITH ANY GUARANTEE, WARRANTY, OR REPRESENTATION; INSTEAD, ALL INFORMATION AND CONTENT IN THIS ARTICLE ARE VERY GENERIC IN NATURE. THE AUTHOR DOES NOT WARRANT, GUARANTEE, OR REPRESENT THAT THE CONTENTS OF THIS ARTICLE ARE ACCURATE, COMPLETE, OR UPDATED.
