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Proposed Form D Adds New Disclosures and Penalties that Some Say Offset Rule 506c’s Advantages

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Part 10 of a series of posts on the JOBS Act

One of the main goals of the JOBS Act of 2012 was to open up investment in startup companies by changing some of the rules regarding advertising of investment opportunities.

Eliminating the decades-old ban on general solicitation of private placements through the passage of Rule 506c created significant new opportunities for private issuers, who could now publicly spread the word about investment offerings.

But the U.S. Securities and Exchange Commission (SEC) also proposed a series of rule changes that would increase disclosure requirements and impose new consequences for failing to follow the new rules.

Firms that issued securities under the existing Rule 506 were required to file a Form D with the SEC, disclosing certain categories of information about the issuer, the offering and potential investors.

Under the new proposed SEC rules regarding Form D filings—aimed at giving teeth to Form D filing requirements—a failure to comply with Form D filing requirements at any time within the five-year exemption period would result in an automatic one-year disqualification from using Rule 506 exemptions.

Issuers would get a pass on their first violation of the new Form D filing requirements, but a second violation would prohibit a firm from future Rule 506 filings for a full year from the date when all required Form D filings were made.

In addition, new SEC rules would require an “Advance Form D” filing at least 15 days before commencement of the Rule 506c offering, and a “Closing Form D” filing. So, there would then be three potential times that a filing requirement might be missed and the one-year disqualification penalty imposed.

The new Form D filing would also require more disclosure and transparency. Issuers would be required to include in their Form D filings information not required beyond the current rule, such as the number and types of accredited investors who purchased securities and information about investment advisors who directly or indirectly act as promoters of a pooled investment fund issuer.

Form D serves as the official notice to the SEC of an offering of securities made without registration under the Securities Act in reliance on the exemptions provided by Regulation D, Sections 3c or 4(6) under the Securities Act.

Form D must be filed with the SEC through its Electronic Data Gathering and Retrieval System (EDGAR). The form is available on the SEC website upon filing.

Among the requirements of the new Form D:

  • Basic identification and contact information about the issuing company and related persons
  • Disclosure of a company’s principal place of business addresses and telephone numbers
  • Disclosure of related persons who are promoters or company executive officers and directors
  • Identification with an industry group from the form’s specified list
  • Disclosure of a revenue range from information in Form D, or to choose the “Decline to Disclose” or “Not Applicable” option for a fund that seeks asset appreciation only
  • Identification of the exemption or exemptions being claimed for the offering
  • Disclosure of whether the offering will last more than a year
  • Identification of the types of securities being offered, such as debt or equity
  • Disclosure of whether the offering is being made in connection with a business combination such as an exchange offer, a merger or acquisition
  • Disclosure of the minimum investment amount per investor that will be accepted in the offering
  • Information relating to sales compensation
  • Disclosure of the total number of investors in an offering, including both accredited and non-accredited investors
  • Disclosure of gross proceeds to be used to pay related persons, including officers and directors

The new Form D proposed rules are finding significant criticism from those who say their increased disclosure requirements and filing penalties  appear to outweigh the advantages of being able to publicly solicit investment under Rule 506c exemptions.

“All of these new filing requirements are going to increase the cost of offerings to startups, creating an unfortunate consequence—despite the fact that one of the hoped-for results of Dodd-Frank was the easing of regulatory burdens on startups,” said Joe Wallin in his Startup Law Blog

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