Form D is a document that the SEC requires a company to file when it issues securities in a private placement under Regulation D. It must be filed with the SEC within 15 days of the first sale of a security in a private placement. In addition, for offerings made under Rule 506 (the most frequently used part of Regulation D), an issuer must also file a copy of Form D (along with a filing fee) with the securities administrator of each state in which purchasers of the securities reside within 15 days of the first sale within each state. Overall, Form D is a relatively simple document to complete and file; however, it’s very easy for a small company to overlook filing one, especially if it doesn’t use qualified legal counsel for its securities offering. I frequently get asked about what happens when an issuer fails to file Form D or if the issuer files it late. This post describes what consequences can and cannot occur.
The first consequence an issuer might be concerned about is losing the federal private placement exemption and consequently be in violation of securities laws by improperly selling unregistered securities. Thankfully, a failure to file a Form D does not result in the loss of the federal registration exemption. The SEC has issued guidance on this in Question 257.07 of the Securities Act Rules Questions and Answers of General Applicability. While filing Form D is a requirement for using a registration exemption under Regulation D, it is not a condition to qualifying for the exemption. Instead, the only potential consequence on the federal level is that the SEC could take action against the issuer and seek to have the issuer enjoined from future use of Regulation D under Rule 507. If the violation is willful, it could also constitute a felony. Despite the fact that Form D is not a condition to being exempt under Regulation D, I would caution issuers to not take their responsibility to file Form D lightly. Often when an issuer is sued in court, the plaintiff will accuse the issuer of violating the federal registration requirements of the Securities Act. In such instance, the issuer will bear the burden of proof to prove that the securities offering met an exemption under Regulation D. While courts have explicitly stated that failing to file Form D does not create a private right of action, an issuer may be assisted in meeting its burden of proof that the securities were issued pursuant to an exemption under Regulation D by producing a properly filed Form D. Therefore, while failing to file Form D may not result in the SEC seeking penalties against an issuer for selling unregistered securities, it could put an issuer at a disadvantage in civil litigation by eliminating one piece of evidence that an issuer can use to build their case that they substantially complied with Regulation D. In addition, the SEC may seek substantial penalties against an issuer who has failed to properly file Form D.
The other question an issuer may be concerned about is what are the consequences for failing to file Form D at the state level. Most Regulation D offerings are conducted through Rule 506. When an issuer makes use of Rule 506 to issue securities, those securities are considered “covered securities,” and state registration requirements are preempted. However, states are permitted to require that the issuer file a copy of the Form D (along with a filing fee) with the state securities administrator if the issuer has sold its securities to the state’s residents. Is the preemption of state securities registration requirements in a Rule 506 offering lost if the issuer fails to file with a state? The SEC’s position is that it is not. Under Question 257.08 of the Securities Act Rules Questions and Answers of General Applicability, the preemption is not conditioned on properly making a notice Form D filing with a state. One word of caution: some states take the opposite position. The Wisconsin Department of Financial Institutions for instance takes the position that if a Form D is filed late in Wisconsin, the issuer must find another exemption or register the security. My personal opinion is that if the Wisconsin Department of Financial Institutions ever took the case to court and claimed that a Rule 506 offering needed to be registered because a Form D was late, Wisconsin would lose that case, as courts have repeatedly held that failure to make a notice filing does not strip the offering of the status of a “covered security.” But taking such a case to court would be expensive. In addition, there can still be significant consequences on the state level beyond losing a registration exemption for an issuer who fails to make required notice filings. States can issue fines or even stop orders, preventing further sales of securities by an issuer. Arkansas, for example, is one state that has been particularly aggressive in issuing fines for late Form D filings.
The good news here is that if an issuer accidentally fails to file a required Form D when conducting an offering or files it late, that will not invalidate the private placement registration exemption, which would potentially be a catastrophic event for an issuer. However, the SEC and state securities administrators can still issue fines and prevent an issuer from engaging in future private placements, so issuers still need to be diligent in making all required securities filings when conducting private placements.
 See Hamby v. Clearwater Consulting Concepts, Lllp, 428 F.Supp.2d 915, 920 (E.D. Ark., 2006).
 In a court trial, the issuer would have to produce additional evidence to show substantial compliance with Regulation D, such as subscription documents that evidenced an inquiry into whether the investors were accredited or sophisticated.
 See for example Chanana’s Corp. v. Gilmore, 539 F.Supp.2d 1299 (W.D. Wash., 2003) for an example of a case where a court concludes that a late filing does not cause a security to lose its status as a “covered security.”
© 2011 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.