Form D Process to be Streamlined

June 18, 2008

The Securities and Exchange Commission (“SEC”) recently adopted final rules [1] intended to streamline the process of filing a Form D to report to the SEC the initial sale and subsequent sales of securities not registered under the Securities Act of 1933 (the “Securities Act”). [2] The changes adopted by the SEC will affect the process in several ways.  Once the final rules become effective on September 15, 2008:

• Form D information requirements will change;
• the frequency of amendment filings will be limited; and
• electronic Form D filings will replace paper filings (although paper filings will continue to be permitted during a transition period that will end on March 16, 2009). 

Information Requirements

While the Final Rules will not appreciably expand the nature of the information to be provided on Form D, greater detail than is currently required will be demanded regarding the issuer and the issuance.  Conversely, some information that has been demanded to date will no longer be needed.  These changes include: 

• permitting filers to identify all issuers in a multiple-issuer offering in a single Form D filing;
• deleting the current requirement to identify as “related persons” owners of 10 percent or more of a class of the issuer’s equity securities;
• replacing the current requirement to provide a business description of the issuer with a requirement to classify the issuer by industry from a pre-established list of industries;
• requiring revenue range information for the issuer, or net asset value range information in the case of hedge funds (subject to an option to decline to disclose);
• requiring more specific information on the registration exemption claimed by the issuer in the Form D notice as well as information on any exclusion claimed from the definition of “investment company” under the Investment Company Act of 1940 (“Investment Company Act”);
• requiring disclosure of the date of the first sale in the offering;
• requiring disclosure of whether the offering is expected to last more than a year;
• limiting reporting of the minimum investment amount accepted in the offering to the amount accepted from outside investors, so as not to affect employee stock ownership incentive plans adversely;
• requiring CRD numbers for both individual recipients of sales compensation and associated broker-dealers;
• replacing the current requirement to disclose information on a wide variety of expenses and applications of proceeds with a requirement to report expenses only as to amounts paid for sales commissions and, separately stated, finders’ fees, and report use of proceeds only as to the amount of proceeds used to make payments to executive officers, directors and promoters;
• replacing the current federal and state signature requirements with a combined signature requirement that includes an undertaking to provide offering documents to regulators on request (subject to applicable law), a consent to service of process and a certification that the issuer is not disqualified by rule from relying on an exemption claimed; and
• permitting a limited amount of free writing in “clarification” fields to the extent necessary to clarify certain information provided (but only for up to five “free writing” responses).

As a practical matter, these changes will require significantly more time to complete initial filings.  Whether the limitations on the need to make amendments discussed below will compensate remains to be determined.  Moreover, because detail regarding the nature of the issuer (both to identify its industry grouping and the issuer type), specific dates for the first issuance, and CRD numbers for recipients of sales commissions and broker-dealers is required, preparation may have to involve third party input.

Amendments

The Final Rules will significantly change the requirements pertaining to the filing of amendments to a Form D with the SEC.  The Final Rules will limit amendments to a previously filed Form D as follows:

• for an offering that continues for more than a year, an amendment will be required before the expiration of twelve (12) months from the most recent prior Form D filing;
• to correct a material mistake of fact or error; and
• to reflect changes in the information provided, unless those changes occur after an offering terminates or those changes relate solely to:
• in the address or relationship to the issuer of a related person identified in on Form D;
• an issuer’s revenues or aggregate net asset value;
• an increase in the minimum investment amount;
• a decrease in the minimum investment amount of not more than 10%, in the aggregate;
• any previously reported address or state in which sales have been made;
• a decrease in the total offering amount;
• an increase in the total offering amount of not more than 10%, in the aggregate;
• the amount of securities sold in the offering or the amount remaining to be sold;
• the number of non-accredited investors who have invested in the offering, as long as the change does not increase the number to more than 35;
• the total number of investors who have invested in the offering;
• a decrease in the amount of sales commissions, finders’ fees or use of proceeds for payments to executive officers, directors or promoters; or
• an increase in the amount of sales commissions, finders’ fees or use of proceeds for payments to executive officers, directors or promoters of not more than 10%. [3]

In contrast to current requirements for an annual amendment between January 1 and February 14, the Final Rules will require an annual amendment only if an entire calendar year has passed since the last filing.  Under the Final Rules, issuers will have to file an annual amendment only on or before the anniversary of the initial filing or the most recent amendment.  In the case of an amendment to correct a mistake or error or to provide changed information, amendments will be required “as soon as practicable” following discovery of the mistake, error or changed information.  Any time any amendment is filed (for a correction, new information or annually), a full response to all parts of the Form D must be made, even parts that have no changes. 

The time requirement for the filing of an initial Form D has not been revised.  The current requirement that a Form D must be filed within 15 days of an issuer’s first sale in an unregistered private offering remains unchanged in the Final Rules.

Electronic Filing

Issuers will be able to file Form D with the SEC electronically via an interactive web-based application accessible from any computer with an Internet connection.  It is not currently clear, though, whether electronic filing will be available to satisfy Form D filing requirements with the several states.  The SEC “hopes” that state securities regulators, who will be able to access the information on the web site, will accept electronically filed Forms D.  However, unless and until the state regulators agree to join the SEC’s web-based system, state filings must continue to be made via “paper” filings.  Indeed, the current Form D appendix that allows filers to list state-specific issuances will be removed in its entirety.  How, therefore, state specific sales information is to be provided to state regulators is unclear at this time. 

Once the Transition Period ends, only proven “hardship” exemptions will be excused from the electronic filing requirements for filings with the SEC.  In order to access the SEC’s web-based system and submit an electronic Form D, though, an issuer will have to possess a Central Index Key (CIK) number.  In order to obtain a CIK number, an issuer will have to file Form ID with the SEC.  Issuers should note that the issuance of a CIK number may take several days. 

Finally, due to a proposed “timing out” feature for completing on-line forms, all of the information needed to complete Form D will have to be available before an on-line attempt to complete the form begins.

[1] 73 FR 10592, et seq., Release Nos. 33-8891, 34-57280, 39-2453, IC-28145 (the “Final Rules”). 

[2] Form D is required for issuances exempt from Securities Act registration under Rules 504, 505 and 506, and under Section 4(6) of the Securities Act.

[3] The Final Rules broadened considerably the list of changes the earlier Proposed Regulations would have exempted from amendment.  As proposed, amendments would have been required for all but four of the changes above (the issuer’s revenue, the total offering amount, the amount of securities sold in the offering and the number of accredited investors).

For additional information on this topic, you may contact Howard A. Neuman or Carol Spawn Desmond.