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by Laura Anthony, Esq.

The SEC has Issued Proposed Rules Amending Regulation D, Form D and Rule 156 – Part I

On July 10, 2013, the same day the SEC adopted final rules eliminating the prohibition against general solicitation and advertising in Rules 506 and 144A offerings as required by Title II of the JOBS Act, and adopted new rules disqualifying felons and other bad actors from participating in Rule 506 offerings as required by Section 926 of the Dodd-Frank Act, the SEC issued proposed rules further amending Regulation D, Form D and Rule 156. 

Summary of Proposed Rule Changes

The proposed amendments will (i) require the filing of a Form D to be made before the issuer engages in any general solicitation or advertising in a Rule 506(c) offering and require the filing of a closing amendment to the Form D at the termination of the offering; (ii) require that all written general solicitation material used in a Rule 506(c) offering include certain legends and disclosures; (iii) require that all written material used in general solicitation and advertising be submitted to the SEC; (iv) disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, failed to comply with the Form D filing requirements for a Rule 506 offering in the last five years; (v) amend the Form D to include additional information about offerings; and (vi) amend Rule 156 to extend the antifraud guidance in the rule to include sales literature of private funds (hedge funds).   In addition, as part of the proposed rule release, the SEC is seeking comments from the public on the definition of “Accredited Investor.”

This blog addresses the proposed rule changes to Form D and Rule 507.  Part II in the series will discuss the proposed amendments to general solicitation materials, including the temporary requirement that all such materials be submitted to the SEC.  

Proposed Amendments Related to Form D

A Form D is a notice of an offering of securities conducted under Regulation D that must be filed with the SEC no later than 15 calendar days from the first sale of the securities in the offering.  The current information in a Form D includes identifying information such as the issuer’s full name and address; year and place of incorporation; information about executive officers, directors and promoters; the exemption being claimed; and factual information about the offering such as the type of securities and amount and the states of resident of investor purchasers.  Currently, the failure to file a Form D in and of itself does not disqualify the use of an exemption.

With respect to Form D, the SEC is proposing to:

  • Amend Rule 503 to require: (1) the filing of a Form D no later than 15 calendar days in advance of the first use of general solicitation in a Rule 506(c) offering; (2) the filing of an amended Form D within 15 days of the first sale of securities under the offering; and (3) the filing of  a closing amended Form D within 30 calendar days of the termination of the offering (in the case where an issuer does not use general solicitation and advertising until 15 days or more after the first sale, (1) and (2) would be accomplished in a single filing);
  • Amend Form D to require additional information regarding offerings;
  • Amend Rule 507 to disqualify an issuer from relying on Rule 506, for one year, if the issuer or any predecessor or affiliate of the issuer failed to comply with the Form D filing requirements within the last five (5) years. 

One of the main purposes of requiring an advance filing of a Form D is for state regulators, who often review Form D filings for red flags that the offering may be fraudulent, and will be given advance warning of any offering that may be advertised in their state.  In addition, the SEC believes it, together the closing Form D, will provide both the SEC and state regulators with useful information in analyzing the impact of the new Rule 506(c) offering.

The proposed rule changes will not change the existing requirements that an issuer file an amendment to correct material mistakes of fact or other errors or a change in information previously provided, and file a new Form D annually for ongoing offerings.

The proposed changes related to additional information requirements are specific to Rule 506 and especially Rule 506(c) offerings, including information related to the types of general solicitation used and methods used to verify accredited investor status of purchasers.  In addition, issuers would be required to provide their website address, if any; the identity of controlling persons that are not otherwise disclosed as officers, directors or promoters; the issuer’s industry group; information about the issuer’s size, including revenues (subject to certain rights to decline to disclose based on confidentiality); identification of trading symbol and cusip, if applicable; additional information on the investors including whether they are natural persons or entities; additional information on use of proceeds and specifically uses related to the repurchase of existing securities, payment of offering expenses, acquisition of assets out of the ordinary course of business, financing acquisitions, working capital and to discharge indebtedness. 

Proposed Amendment to Rule 507

The SEC has proposed to amend Rule 507 to disqualify an Issuer from relying on Rule 506, for one year, for future offerings, if the Issuer or any predecessor or affiliate of the issuer failed to comply with the Form D filing requirements within the last five (5) years.  Compliance with Form D filing requirements would include requirements to file any amendments or closing Form D’s. 

Currently, an Issuer is only disqualified if it has been subject to a court order or injunction for failure to file a Form D.  The new proposed amendment contains an automatic disqualification.  The rule change is significant as an Issuer that engages in a 506 offering which otherwise follows the letter of the law, but for which they are subject to the automatic disqualification, would be guilty of a section 5 violation and face severe consequences, including the requirement to offer rescission to investors, exposure to civil claims by investors and exposure to civil regulatory enforcement proceedings by regulators that would likely seek both monetary and injunctive relief. 

Although an Issuer would be disqualified from relying on Rule 506 for future offerings for the failure to file a Form D, the failure to file the Form D, in and of itself, does not result in a loss of the exemption for the current offering.  The proposed amendment to Rule 507 is not retroactive.  That is, disqualification will only occur for the failure to file a Form D for an offering after the Rule 507 amendment goes into effect. 

Moreover, in light of the severe impact of the failure to file, the SEC has proposed a one-time cure period of 30 calendar days following the missed due date for the Form D filing.  Issuers will not be able to rely on the cure period more than once. 

An Issuer may petition the SEC for a waiver of the disqualification.  A waiver will only be granted if the Issuer can demonstrate good cause.  Good cause could include a complete change of control over the Issuer since the missed filing or that a predecessor Issuer no longer exists and therefore cannot cure the missed filings.

The SEC Comment Requests

In its requests for comments, the SEC poses specific questions which are often telling in regard to possible changes to the proposed rules, or future rule making.  The SEC has requested comments on the above rule changes in general, and in particular is seeking input on the following (note that this is not a complete list of the comment requests):

  • What should the consequences be for the failure to file the advance Form D in a 506(c) offering, including whether it should include an immediate loss of the use of the exemption?
  • What is the impact to the issuer if a third party engages in some form of solicitation or advertising before the filing of the Form D and without the issuer’s consent?  Can the issuer cure with the immediate filing of an advance Form D?
  • Should a Form D have additional information requirements and suggestions as to this additional information?
  • Will the proposed new Form D filing requirements deter issuers from capital raising activities or chill the marketplace in any way?
  • Should the issuer lose the 506 exemption if they fail to file the closing Form D?
  • Should the SEC provide a better explanation of what constitutes a termination of the offering?
  • Should the SEC provide additional rules as to what constitutes a change so as to require the filing of an amendment to the Form D?
  • Should any additional information be required in the Form D or any of its amendments, including the closing amendment?
  • Should the SEC require amendments as milestones are reached – for example, the sale of 10% of the offering, etc.?
  • Should pooled investment funds (hedge funds) be required to provide different information in a Form D?
  • Is disqualification too harsh a consequence for the failure to file a Form D, its amendments or a closing Form D?
  • Should the Rule 507 amendment be retroactive?
  • Should Rule 507 have different requirements for pooled investment funds (hedge funds)?
  • Should disqualification be automatic or only following an SEC order or court order?

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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