On December 20, 2024, the Securities and Exchange Commission (“SEC”) announced charges against two private companies and a registered investment advisor for failure to file a Form D in connection with exempt offerings under Regulation D under the Securities Act of 1933 (the “Securities Act”).
Section 4(a)(2) and Regulation D
The Securities Act requires that all offers and sales of securities either be (1) registered with the SEC under the Securities Act or (2) exempt from registration. Perhaps the most commonly used exemption for unregistered securities offerings is Regulation D, promulgated under the Securities Act.
Section 4(a)(2) of the Securities Act exempts transactions not involving a public offering from the registration requirement of Section 5 of the Securities Act. Rule 506 of Regulation D provides a safe harbor for a transaction not involving a public offering within the meaning of Securities Act Section 4(a)(2) which will not require SEC registration under Section 5. The Rule 506(b) safe harbor is valuable because it provides objective criteria for making a private offering which would satisfy the requirements of Securities Act Section 4(a)(2). Rule 506(b) of Regulation D allows for offers and sales to an unlimited number of “accredited investors”1, but, among other conditions, “general solicitation” and “general advertising” of the offering is prohibited.2
Rule 506(c) of Regulation D provides an alternative safe harbor where an offering may be conducted with general solicitation and general advertising. However, such an offering must be conducted in compliance with the other conditions of the rule, notably the condition that all purchasers are accredited investors, as verified by the issuer through reasonable steps such as those set forth in Rule 506(c)(2)(ii). If so, the offering will not be deemed a public offering within the meaning of Securities Act Section 4(a)(2) and consequently also will be exempt from the registration requirement of Section 5 of the Securities Act.
Rule 503 of Regulation D mandates that, when selling securities in reliance on Rule 506 or Rule 504 of Regulation D, the issuer must file a notice of sales on Form D with the SEC “for each new offering of securities no later than 15 calendar days after the first sale of securities in the offering”.3
Form D requires disclosure of summary information about the company and the offering. It provides the SEC with a notice of sales of securities made under Regulation D and is a “primary source of information on the Regulation D market”, as explained by the SEC in the recent charges. However, it is important to note that filing Form D is not a condition to the availability of the exemption from registration pursuant to Rule 504 or 506 of Regulation D, and failure to file a Form D will not cause a Rule 506 offering to lose its “covered security” status under Section 18 of the Securities Act.4
SEC Charges
These charges are noteworthy because the SEC has rarely brought charges only for failure to file a Form D. The SEC brought the charges5 against three companies for violating Rule 503 of Regulation D by failing to file a Form D for their unregistered securities offerings. Notably, all three actions are against companies which presumably could not have relied on the nonpublic offering exemption of Securities Act Section 4(a)(2) because they all involved general solicitation or general advertising. Consequently, the SEC concluded that these companies must have conducted their offerings in reliance on either Rule 504 or Rule 506(c) of Regulation D under which rules Rule 503 also required a Form D to be filed. However, the Forms D were not filed.
In the SEC’s orders bringing charges, it explains that the failure to file a Form D is problematic because it:
- impedes the SEC’s “ability to fully assess the scope of the Regulation D market” which the SEC must be able to assess in order to determine “whether Regulation D is appropriately balancing the need for investor protection and the furtherance of capital formation, particularly as it relates to small businesses”;
- “harms the [SEC]’s ability to monitor and enforce compliance with the requirements of Regulation D as well as state securities regulators’ and self-regulatory organizations’ ability to monitor and enforce other securities laws and the rules of securities self-regulatory organizations”, and
- creates issues for investors and other market participants who use Form D “to understand whether companies are complying with federal securities laws in their offerings, to do research and analysis on the Regulation D market, and to report on capital-raising in industries that use Regulation D”.
All of the companies settled with the SEC by agreeing to cease and desist from failing to comply with Rule 503, and they were all required to pay civil money penalties.
These SEC charges should serve as a reminder for issuers and their advisers to be sure to comply with the requirement to file Form D when they are conducting a private offering in reliance on Regulation D, particularly when the offering involves general solicitation or general advertising such as under Rule 504 or Rule 506(c) of Regulation D (when no alternative exemption from registration, such as a “private placement” under Securities Act Section 4(a)(2), is likely to be available). While the SEC charges do not address state law compliance, companies conducting such offerings also should be mindful of state law requirements to file copies of the SEC Form D in relevant states, where failure to do so also would be a violation of state law.
If you have any questions regarding the foregoing, please contact one of the partners listed below or your primary Seward & Kissel attorney.
