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Consequences Of Failing To File A Form D

I often get calls from clients or potential clients that have engaged in exempt offerings, have not filed a Form D and are wondering what the consequences might be.  Taking it further, what are the consequences of not complying with the minor state blue sky requirements for any federally covered securities?

Form D – In General

A Form D is a brief fill-in-the-blank form that is filed with the SEC in connection with an offering or issuance of securities in reliance on the exemptions from the Securities Act of 1933 (“Securities Act”) registration requirements found in Regulation D.  The offering exemptions in Regulation D consist of Rules 504, 506(b) and 506(c) (see HERE).

A Form D is a notice filing.  Rule 503 of Regulation D, which was last amended in November 2016, requires that a company relying on Rules 504 or 506 must file a Form D, notice of sales, with the SEC for each new offering of securities no later than 15 calendar days after the first sale of securities in the offering.  The Rule requires that a Form D by filed via EDGAR and be signed by an authorized person.

Rule 503 also sets out requirements requiring amendments to the Form D and the timing of filing of such amendments.  The Rule is very specific.  A company may amend a Form D at any time voluntarily.  A company must amend a Form D (i) to correct a material mistake of fact or error; or (ii) to reflect a change in the information provided as soon as practicable after that change; and (iii) annually on or before the first anniversary of the filing of the Form D or most recent amendment.

No amendment is required under item (ii) if the change occurs after the offering is terminated or solely relates to: (a) the address of the company or an identified person; (b) the companies’ revenues or aggregate net asset value; (c) the minimum investment amount if the change is an increase or if a decrease, does not result in a decrease of more than 10%; (d) any address or state of solicitation; (e) the total offering amount if the change is a decrease or if an increase, does not result in an increase of more than 10%; (f) the amount of securities sold in the offering or amount remaining to be sold; (g) the number of non-accredited investors as long as the change does not increase the number to more than 35; (h) the total number of investors in the offering; or (i) the amount of sales commissions, finders fees, or use of proceeds for payments to executive officers, directors or promoters if the change is a decrease, or if an increase, that increase is not more than 10%.

Federal Consequences of Failure to File

Rule 503 gives no indication that a Form D filing is voluntary, but rather uses the word “must” throughout.  Rule 507 disqualifies a company from relying on Regulation D if it or any of its predecessors or affiliates have been subject to any order, judgment, or decree of any court of competent jurisdiction temporarily, preliminarily, or permanently enjoining such a company for failure to comply with Rule 503.  Rule 507 does allow for the SEC to overrule this provision if it determines, upon a showing of good cause, that it is not necessary under the circumstances to deny the exemption.  Rule 507 was also last amended in November 2016.  Rule 507 certainly appears to add teeth to the Rule 503 Form D filing requirement.

However, in 2009, the SEC issued a C&DI clearly indicating that the failure to file a Form D does not impact the availability of an exemption under Regulation D.  In particular:

Question: Is the filing of a Form D in connection with an offer or sale a condition to the availability of a Regulation D exemption for that offer or sale?

Answer: No. The filing of a Form D is a requirement of Rule 503(a), but it is not a condition to the availability of the exemption pursuant to Rule 504 or 506 of Regulation D. Rule 507 states some of the potential consequences of the failure to comply with Rule 503.

In conversations with the SEC staff members, I have confirmed that the SEC will not pursue an enforcement action or otherwise take a negative position against a company for the failure to file a Form D alone.  However, if an enforcement action is pursued for other reasons, such as fraud, the SEC may bolt on a claim for a violation of Rule 503.

Over the years, some industry professionals have proffered the idea that although the SEC did not require the filing of a Form D, a state may take the position that a federally pre-empted offering is not perfected, and thus pre-emption not secured, unless a Form D is filed.  To address this concern, the SEC issued another C&DI in 2017 and in particular:

Question: Will a Rule 506 offering lose “covered security” status under Section 18 of the Securities Act if an issuer fails to file a Form D with the SEC?

Answer: No. A “covered security” under Section 18 of the Securities Act is defined to include a security with respect to an offering that is exempt from registration under the Act pursuant to SEC rules or regulations issued under Section 4(a)(2) of the Act. Rule 506(b) was issued under Section 4(a)(2) of the Act; Congress determined in the JOBS Act that Rule 506(c) would be treated as a regulation issued under Section 4(a)(2). Filing a Form D is not a condition that must be met to qualify for the Rule 506 exemption.

Although it appears that the failure to file a Form D has no real impact, the fact is that the failure to file is a stand-alone violation of Rule 503 and if a court temporarily, preliminarily, or permanently enjoining such a company for failure to comply with Rule 503, the ability to rely on Regulation D will be lost.  Also, the SEC has only protected the use of Rule 506, which is a federally covered transaction, a Rule 504 offering could still be challenged on the state level if the mandated Form D is not filed.

State Blue Sky Consequences of Failure to File

Generally, an offering and/or sale of securities must be either registered or exempt from registration under both the federal Securities Act and state securities laws.  As a result of a lack of uniformity in state securities laws and associated burden on capital-raising transactions, on October 11, 1996, the National Securities Markets Improvement Act of 1996 (“NSMIA”) was enacted into law.  The NSMIA amended Section 18 of the Securities Act to pre-empt state “blue sky” registration and review of specified securities and offerings.  The pre-empted securities are called “covered securities.”  For an in-depth discussion of the NSMIA and state blue sky laws, see my two-part blog HERE and HERE.

Among other NSMIA covered transactions/securities are securities issued in a Rule 506 offering, and as noted above, Rule 506 will not lose its covered status as a result of a failure to file a Form D.  However, Rule 504 is not a covered transaction and requires compliance with state blue sky laws.  It is possible that an individual state would deem the failure to file a Form D, an actionable violation of their offering requirements.  In the event a state received a judgment that included a violation of Rule 503, Rule 507 would kick in and have a devastating effect on future capital raising efforts for a company.

Moreover, the NSMIA specifically contains a provision allowing a state to require a notice filing and the payment of a fee.  That notice filing is generally the Form D.  NSMIA also reserves power for a state to pursue fraud actions.  Accordingly, even if a state could not claim that a Rule 506 offering was no longer federally pre-empted for the failure to file a Form D, the state could bolt on a Rule 503 violation in a fraud claim, again, with a potentially disastrous impact on future capital raising efforts.

Section 4(a)(5)

Section 4(a)(5) is a rarely, if ever, used exemption from the registration requirements for sales made to accredited investors.  Section 4(a)(5) has the following requirements: (i) delivery of a prospectus that complies with Securities Act disclosure requirements; (ii) no general solicitation or advertisement; (iii) an offering maximum of $5,000,000; and (iv) the filing of a Form D.  In this case, the filing of a Form D is an actual requirement to rely on the exemption and the SEC has not watered down that requirement through any guidance.  However, since a Section 4(a)(5) offering does not pre-empt state law and offers no benefits over a Regulation D offering (but does obviously have several detriments), it is almost never used.  I suspect, this offering exemption will go the way of Rule 505 and eventually be eliminated.

The Author

Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC 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, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with 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; 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 American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA 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 small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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