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 person opinion is that if the
Wisconsin Department of Financial Institutions ever took the case you 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 accidental 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
 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 http://www.wdfi.org/fi/securities/regexemp/exemptions/23_19_506.htm
 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
Read more articles by Alexander Davie at Strictly Business, a
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