SEC Files Charges for Failures to Effect Form D Filings
03 January 2025
In December 2024, the SEC announced that it had filed charges against several entities for failing to timely file a Form D in private placements of securities, violating Rule 503 of Regulation D.1 In each case, the relevant issuer conducted one or more Rule 506 offerings of securities, utilizing a general solicitation, but did not file the required Form D. Each of the issuers was required to pay civil penalties to the SEC as a result of these failures.
Summary of Regulation D
Regulation D sets forth several offering exemptions and a safe harbor from the registration requirements of the Securities Act of 1933 (the "Securities Act"). These exemptions generally require the issuer to file a Form D within 15 days after the first sale of securities in the offering.
Regulation D consists of several rules, set forth as Rule 501 through Rule 508 under the Securities Act. Two of these rules (Rules 504 and 506) set forth transactional exemptions from the Securities Act's registration requirements. The Rule 506 exemption is the most flexible and widely used of these exemptions.
Rule 506(c) permits companies to raise an unlimited amount of funds from an unlimited number of "accredited investors," as that term is defined in Rule 501(a) of Regulation D. Under Rule 506(c), issuers can engage in "general solicitation and advertising" of the offering, but to do so, they must take reasonable steps to verify that all investors are accredited.2 In contrast, Rule 504 of Regulation D provides an exemption from registration under the 1933 Act for the offer and sale of up to $10,000,000 of securities in a 12-month period, and may be used only by non-public companies.
Form D is a short notice that includes, for example, the names and addresses of the company’s executive officers and directors, and a variety of details about the private placement. Unlike a registration statement or a prospectus, the Form D does not contain significant information about the company itself or its operations and financials. Form D's are filed on the SEC's electronic filing system, EDGAR, and are therefore available for review by the SEC and members of the public.3
Notably, the failure to file a Form D does not result in a loss of the exemption from registration under the Securities Act, even though the failure to make the filing is a "technical" violation of Regulation D. As a result, a variety of Regulation D offerings have been completed in the past without Regulation D filings, perhaps with the relevant parties estimating that the possibility of sanctions was relatively low.4 The SEC's actions in this area in effect serve as a reminder of the need for offering participants to fully comply with this aspect of the rules.
The Need for Form D Filings
In its three orders, the SEC emphasized that the Form D filings are the SEC's principal source of information relating to market activity under Regulation D. Accordingly, in the SEC's view, the failure to file a Form D has a variety of potential negative impacts for the SEC and the public, including:
- the SEC's ability to fully assess the scope of the Regulation D market is impeded;
- the failure to effect Form D filings reduces 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 these self-regulatory organizations;5
- the failure to effect these filings impacts investors and other market participants, as the Form D filings can be a source of information for market participants, including to determine whether parties are complying with the federal securities laws in connection with the relevant offerings, to conduct research and analysis on the Regulation D market, and to report on capital-raising in industries that use Regulation D.
Conclusion
These actions indicate that the SEC takes seriously the requirement of issuers to file a Form D when effecting Regulation D offerings. Even though the safe harbor provided by Regulation D remains available even if the form is not filed, issuers should ensure that they are effecting these filings as required by the regulations.
- The SEC's orders in these matters can be found here: https://www.sec.gov/files/litigation/admin/2024/33-11346.pdf, https://www.sec.gov/files/litigation/admin/2024/33-11347.pdf and https://www.sec.gov/files/litigation/admin/2024/33-11348.pdf.
- Each of the SEC's orders involved offerings that used a general solicitation; practitioners have suggested that the use of general solicitations, while permitted by Regulation D, may increase the likelihood of SEC or other regulatory scrutiny, since the general solicitation increases the possibility that retail investors will participate in the offerings. In addition, because these offerings involved general solicitations, these offerings could not be deemed to have been effected under the "private placement" exemption of Section 4(2) of the 1933 Act; rather, the parties needed to utilize Form D, and were subject to the related Form D filing requirement.
- The SEC's Form D can be accessed here: https://www.sec.gov/files/formd.pdf.
- See, for example, "How to delay your Form Ds (or not file them at all)" (https://techcrunch.com/2019/03/28/how-to-delay-your-form-ds/) for a discussion as to how some issuers may have chosen not to make the required filing.
- For example, the Form D filing requires the issuer to specify the states in which the securities were offered; this information helps enable the state regulators determine whether any required state securities "blue sky" filings were made.
