The proposed amendments to Reg D have sparked a lot of controversy. Here’s a run down of the Good, the Bad, and the Ugly from the proposal:
Advance Form D Filing: To use general solicitation (i.e. advertising) for your securities offering, an issuer will have to file a new Advance Form D, 15 days BEFORE any such general solicitation.
Initial Closing Form D: There is still a requirement to file a Form D within 15 days of the closing of the 1st round. If all the required information was included in the Advance Form D, then no new filing is required. Otherwise, an issuer will need to amend its Advance Form D after the 1st round.
Closing Form D Filing: Within 30 days of the end of an offering, an issuer must file a closing amendment to its Form D with final information on the round. If you decide to leave an offering opening over 1 year, then you must file amendments at least annually.
Legends: All written general solicitation will have to include the following lengthy legends. Will a tweet with a link to these legends be sufficient? It’s unclear.
- The securities may be sold only to accredited investors, which for natural persons, are investors who meet certain minimum annual income or net worth thresholds;
- The securities are being offered in reliance on an exemption from the registration requirements of the Securities Act and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act;
- The Commission has not passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials;
- The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and
- Investing in securities involves risk, and investors should be able to bear the loss of their investment.
General Solicitation Filing Requirements: Issuers will have to file all “written materials” used in general solicitation with the SEC on or before the date of the general solicitation. This means that if you are sending a tweet at 11:59pm, you would have had to have previously filed the tweet with the SEC. If you are sending a tweet at 12:01am, then you will have the next 23 hours and 59 minutes to file the tweet (how do you file a tweet?).
“Written materials” under securities law is a broad term capturing things like pitch decks, videos, TV appearances, webcasts, website content, tweets, facebook posts, recorded songs or anything else digital or broadcast. The logistics involved in managing this requirement are going to be messy from both the SEC’s side as well as the issuer’s side.
Harsh Penalty: If you fail to file a Form D or your general solicitation materials, the issuer and all of its affiliates will be barred from using Rule 506 for 1 year following making the appropriate filing or 5 years after the violation if you never make the filing. This applies to both Rule 506(b) and Rule 506(c). There is a 30 day cure period for late flings for a first offense only. The penalty can be waived by the SEC upon a showing of good cause.
Penalties Do Not Apply to Current Offering: Failure to file a Form D or general solicitation materials will not bust your exemption for the current offering (but see above – you may be barred for 1 year on future offerings)
No Lookback Prior to Rule: Contrary with others are reporting, you will only have to check on your Form D compliance starting on the effective date of the new rule. This means that you will not have to go digging out your deal docs from 2008 – 2013 to make sure you filed your Form D. The rules explicitly state that “disqualification would arise only with respect to non-compliance with Rule 503 that occurred after the effectiveness of new Rule 507(b). The look-back period would not extend past the effective date of the rule, so issuers seeking to conduct a Rule 506 offering would assess compliance with Rule 503 by looking back only to the effective date of the rule.”
New Information Requirements: The Form D will have some additional information requirements as well as reduce the ability to decline to answer certain existing questions. These requirements seem generally reasonable and will provide helpful information to the market and the SEC. The requirements include:
- A 506(b) or 506(c) checkbox
- Types of general solicitation to be used
- Steps the issuer proposes to take to verify accredited investor status
- Details on planned use of proceeds (to the extent known, may be added by amendment later)
- Information on control persons
- Net asset value and revenue (if publicly known – you don’t have to disclose this if it’s not otherwise publicly available)
Private Filings: The Advance Form D and the general solicitation filings mentioned above are all private filings (no EDGAR).
File an Advance Form D Immediately: This will give you cover in the event of any accidental or inadvertent general solicitation. Once you actually begin your offering you can amend the Advance Form D with more specific details about your offering.
Start with a 506(b) and switch to 506(c): It seems that you will be able to file the Advance Form D and still then choose to conduct a 506(b) offering instead by amending the Form D. However, once you generally solicit, you will have blown 506(b) and will then be locked into a 506(c) offering. So an issuer can switch from a 506(b) to a 506(c) at any time, but not vice versa.
Use a Platform to Manage Compliance: These regulations are fraught with traps and potential foot faults. Using a platform like SeedInvest, with built in tools and safeguards to ensure compliance, may be the only manageable way to run 506(c) deals going forward.
Window of Opportunity: All of these are proposed rules and likely will not be in effect when general solicitation goes live on September 23. This means that for a certain period of time (30-90 days), there will be no specific filing requirements to use general solicitation. If you are planning to raise funds for an issuer in the near future, you may consider launching on September 23 to take advantage of this window.
As a reminder, all of these are PROPOSED rules and therefore are not currently in effect and may change substantially before they are implemented. We urge all interested parties to submit their comments to the SEC on these rules here.
This post was written by James Han on September 6, 2016
Proposed Form D Rules: The Good, The Bad and the Ugly