If a company relies on an exemption under Regulation D to offer and sell securities, the company must file what’s known as a Form D with the Securities Exchange Commission (“SEC”) after it first sells its securities.
What Is the Form D?
A Form D is a form to be used to file a notice of an exempt offering of securities. Form D is a brief notice that includes basic information about the company and the offering, such as the names and addresses of the company’s executive officers/directors, the size of the offering and the date of first sale. The Form D must be filed electronically with the SEC.
SEC rules require the notice to be filed by companies and funds that have sold securities without registration under the Securities Act of 1933 in an offering based on a claim of exemption under Rule 504 or 506 of Regulation D or Section 4(a)(5) of that statute within 15 days after the first sale of securities in the offering.
What’s the Difference Between 506(b) and 506(c)?
Companies relying on the Rule 506 exemptions can raise an unlimited amount of capital without having to register a public offering of securities with the SEC. Rule 506 provides two distinct exemptions from registration for companies when they offer and sell securities.
Under Rule 506(b), a “safe harbor” under Section 4(a)(2) of the Securities Act, a company can be assured it is within the Section 4(a)(2) exemption by satisfying certain requirements, including the following:
- The company cannot use general solicitation or advertising to market the securities.
- The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchasers, commonly referred to as non-accredited investors. All non-accredited investors must be sophisticated. The SEC provides that they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.
- Company disclosures:
- Accredited investors: Have some discretion on what information to give to accredited investors, as long as they are not excluding any information if the omission of which makes what is provided to investors false or misleading and so long as it does not violate the antifraud prohibitions of the federal securities laws.
- Companies must give non-accredited investors disclosure documents that are generally the same as those used in Regulation A or registered offerings, including financial statements, which in some cases may need to be certified or audited by an accountant, in addition to all information provided to accredited investors.
- The company must be available to answer questions by prospective purchasers.
Under Rule 506(c), a company can broadly solicit and generally advertise the offering and still be deemed to be in compliance with the exemption’s requirements if:
- The investors in the offering are all accredited investors; and
- The company takes reasonable steps to verify that the investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports, etc.
In addition to the restrictions above, purchasers of securities offered pursuant to Rule 506 receive “restricted” securities, meaning that the securities cannot be sold for at least six months or a year without registering them.
What About State Filings?
In addition to satisfying the requirements of federal securities laws, every state has its own set of securities laws—commonly referred to as “Blue Sky Laws.” While the state requirements to be satisfied and applicable exemptions vary from state to state under Blue Sky Laws, most states typically require companies making offerings of securities to register their offerings before they can be sold in a particular state, unless a specific state exemption is available.
With the exception of a couple, states allow companies to submit state notices via Electronic Filing Depository(“EFD”), managed by the North American Securities Administrators Association, in connection with a Form D filing. Most states require notice filings to be submitted within 15 days after the first sale of securities in the offering. Assuming there is no applicable exemption, state fees can be paid directly via the EFD platform.
