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To Form D or not to Form D?

—RMZ

The Securities Act of 1933 requires any issuer of securities to register such securities with SEC unless an exemption to registration applies under the Securities Act.  Typically, issuers claim an exemption from registration under Rule 504, 505, or 506 of Regulation D of the Securities Act.  An issuer claiming an exemption under Regulation D is required to file a Form D with the SEC within 15 days after issuing securities in a private placement.

Recently, many startups that claim a Regulation D exemption and receive venture capital financing elect to forego filing a Form D. The money raised is therefore kept out of public records.  Though Regulation D requires you to file a Form D, failure to file a Form D arguably does not eliminate an issuer’s ability to rely on the federal registration exemption.

In a private right of action against an issuer, failure to file a Form D puts the issuer in the position of bearing the burden of proof to prove that the securities offering met an exemption under Regulation D.   A filed Form D provides the issuer with evidence of properly being exempted from registration of its securities offering under Regulation D. Failure to file a Form D does not in itself create a private right of action.

An unfiled Form D however is likely to cause the SEC to closely scrutinize the issuer which could lead the SEC to delay an issuer’s public offering.  The SEC could also seek to have the issuer enjoined from future use of Regulation D per rule 507.   Potential acquirers may also have an issue with a failure to file a Form D.

An advantage of an issuer filing a Form D under Rule 506 is that its securities are considered “covered securities” and state requirements for registration of securities are preempted.   However, states where the issuer sold securities may still require notice filings of a copy of the Form D along with filing fees.  Failure to file a Form D notice with a state however does not disqualify the preemption under Rule 506.