SEC Form D and Related Securities Laws: Q&A for Entrepreneurs (2024)

by Scott Edward Walker on November 3rd, 2009

As I mentioned in a recent post, one of things that surprised me when I moved to Southern California from New York City in 2005 was the lack of sophistication of some of the players in the so-called “middle market.” Indeed, I was particularly surprised to see so many investment bankers and other intermediaries running around and raising capital for private companies without being registered as a “broker-dealer” with the Securities and Exchange Commission (the “SEC”). As I have previously discussed (see mistake #4 here), this is a huge potential problem for the issuer, particularly in light of the recent changes to SEC Form D. Accordingly, I thought it would be helpful to entrepreneurs to provide them with a basic understanding of the new, revised Form D and related securities laws via a question-and-answer format.

Question #1: What are the “Securities Laws”?

When lawyers and others refer to the “securities laws,” they generally mean the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”), which were passed by Congress during the peak of the Depression in order to attempt to restore investor confidence in the capital markets. As provided on theSEC website:

“The main purposes of these laws can be reduced to two common-sense notions: [(1)] Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing. [(2)] People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors’ interests first.”

Moreover, each State has (i) its own set of securities laws (so-called “blue sky” laws), which vary from State by State; and (ii) its own State securities commission or department.

Question #2: Do the Securities Laws Apply to Startups?

Yes, the securities lawsapply to all companies that issue “securities” (which termis broadly defined). As I have previously noted (see paragraph #6here), pursuant to applicable securities laws, a company may not offer or sell its securities unless (1) such securities have been registered with the SEC and registered/qualified with applicable State securities commissions; or (2) there is an applicable exemption from registration. The most common exemption for start-up companies is the so-called “private placement” exemption under SEC Regulation D, the safe harbor promulgated under Section 4(2) of the Securities Act (see mistake #2 here). In order to comply with Regulation D, the issuer must, among other things, execute and file a Form D. The SEC recently issued rules and rule amendments adopting revisions to Form D.

Question #3: What is Form D?

Form D is the SEC’s official notice of an exempt offering of securities in reliance upon Regulation D (or Section 4(6) of the Securities Act). As you can see from the actual form, it requires certain prescribed information with respect to the issuer and the offering, including (i) the issuer’s identity, (ii) its principal place of business and contact information, (iii) the names and addresses of its executive officers and directors, (iv) the specific exemption claimed under the Securities Act and (v) as discussed below, the identity (and contact information) of any broker-dealer, finder or other person receiving “any commission or other similar compensation” relating to the sale of securities in the offering.

Question #4: Where Do I File the Form D?

An executed Form D must be filed with (i) the SEC and (ii) if the issuer is relying on Rule 506 of Regulation D, each of the applicable State securities commissions in which (A) the offer originated, (B) the offer was delivered or received and/or (C) part of the sale transaction took place. Certain States may also require the filing of a consent to service and the payment of a filing fee. (The SEC does not charge a filing fee for a Form D notice or amendment.)

Question #5: How Do I File the Form D?

As of March 16, 2009, the SEC requires the electronic filing of Form Ds through the SEC’s Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”). To file online using EDGAR, an issuer must have its own filer identification number (called a “Central Index Key” or “CIK” number) and a set of password-like “access codes.” An issuer may obtain a CIK number and EDGAR access codes at any time (even before it is ready to file its first online Form D); to do so, it must submit basic information to the SEC online at its Filer Management page and also submit a copy of a notarized paper document containing the same information on Form ID. The paper document is called an “authenticating document,” which can be submitted either (i) by scanning and uploading it to the online submission in pdf or (ii) by faxing it to the SEC at (202) 504-2474 or (703) 914-4240. (For more information on obtaining a CIK number and EDGAR access codes, you can review the SEC staff’s Guidance on Form D Filing Process.)

There is currently no electronic filing with the States. Accordingly, to the extent necessary, an issuer must file the Form D with an applicable State securities commission in hard copy. There is nevertheless a strong desire on the SEC’s part to make the electronic system a one-stop filing center for filings with the States.

Question #6: When Must I File the Form D?

The Form D must be filed with the SEC no later than 15 calendar days after the “date of first sale” of securities sold based on a claim of exemption under Rule 504, 505 or 506 of Regulation D or Section 4(6) of the Securities Act. For this purpose, the “date of first sale” is the “date on which the first investor is irrevocably contractually committed to invest, which, depending on the terms and conditions of the contract, could be the date on which the issuer receives the investor’s subscription agreement or check.” In order to avoid any timing issues, an issuer may elect to file the Form D prior to its receipt of a subscription agreement or check (and merely check the appropriate box in Item 7 of the Form D that “First Sale Yet to Occur”). If the date on which the Form D is required to be filed falls on a Saturday, Sunday or holiday, the applicable due date is the first business day following.

The timing of the filing in a particular State is governed by applicable State law or regulations; however, the SEC Division of Corporate Finance has stated (in Section 257.08 of its Compliance and Disclosure Interpretations) that an issuer’s failure to file timely the Form D in a particular State does not result in a loss of State preemption (though certain States may require a late issuer to pay a fine/penalty and/or take other administrative action).

Question #7: Will the Information on the Form D be Publicly Available?

Yes, all Form Ds filed through EDGAR will be available for public viewing in an interactive and searchable format on the SEC’s website. According to the SEC, the online filing system will enable interested parties “to view the information in an easy-to-read format, download the information into an existing application or create an application to use the information.”

Question #8: When Must the Form D Be Amended?

The Form D must be amended (i) to correct a material mistake of disclosure, as soon as practicable after the discovery of the mistake; (ii) to reflect a change in certain reported information (including any change in the issuer’s directors or officers), as soon as practicable after the change; or (iii) “annually, on or before the first anniversary of the most recent previously filed notice, if the offering is continuing at that time.”

The Form D need not be amended to reflect a change that occurs after the offering terminates. Moreover, certain changes in reported information are expressly deemed not to trigger an amendment, including (i) changes in the issuer’s revenues or aggregate net asset value; (ii) changes in the amount of securities sold in the offering (or the amount remaining to be sold); or (iii) changes in the total number of investors who have participated in the offering.

Question #9: Does the New Form D Have Any New Disclosure Requirements?

Yes, as noted above, the new Form D requires, among other things, the disclosure of the identities of all finders engaged in the offering of securities of the issuer. This will obviously result in the increased scrutiny of finders that are not registered as “broker-dealers.” Indeed, as discussed in paragraph #4 here, entrepreneurs often make the mistake of retaining unregistered finders to raise capital on their behalf. If the finder is receiving some form of commission or transaction-based compensation in connection therewith, he will generally be deemed a broker-dealer and thus will be required to be registered with the SEC and applicable state commissions. If he is not registered and sells securities on behalf of an issuer, the private placement will not be valid (i.e., will not be exempt from registration), and the issuer will have violated applicable securities laws (as discussedbelow).

Question #10: Why Should I Care About Any of This?

Non-compliance with applicable securities laws could result in serious adverse consequences, including a right of rescission for the securityholders (i.e., the right to get their money back, plus interest), injunctive relief, fines and penalties, and possible criminal prosecution.

Tags: broker-dealers, EDGAR, entrepreneur, entrepreneurs, Form D, Regulation D, Rule 506, SEC, Securities Act, start-up, start-up companies