SEC Adopts New Rules Amending Form D, Mandating Electronic Filing by March 2009

06.05.2008

The SEC recently adopted new rules amending Form D, which is filed for private placements relying on one of the exemptions under Regulation D of the Securities Act.  The new rules also clarify when amendments to Form D are required.  Finally, the new rules will (ultimately) require that Form D be filed electronically.

The new rules eliminate some of the disclosure required by the current version of Form D.  In particular, companies will no longer be required to identify 10% stockholders by name, or to provide detailed information on the use of offering proceeds.  The new Form D will require some new disclosure in other areas, however, including a requirement to provide information on the recipients of sales commissions or finders fees.  The amendments to Form D are summarized below. 

A preliminary version of the new Form D is attached here.

There is a long lead time for implementation of the new rules.  The SEC’s new online filing system for Form D is expected to be available September 15, 2008.  Following that date, there will be a six-month transition period during which companies will have three options for filing Form D: (i) filing the old version of Form D on paper; (ii) filing the new version of Form D on paper or (iii) filing the new version of Form D electronically. Effective March 15, 2009, the old version of Form D will be eliminated, and electronic filing of the new version of Form D will be mandatory. 

Note that in order to file electronically, users will have to obtain EDGAR filing codes from the SEC.  More information on obtaining these codes is provided in this Client Alert.

Form D is currently filed on paper.  Paper filings can be accessed through the SEC public reference room, and we are aware that some third-party services provide information on recently-filed Form Ds.  Once Form Ds are filed electronically, however, they will be available to everyone with Internet access via the SEC’s EDGAR website.  Start-up companies that are operating in “stealth” mode or who for other reasons have made no public announcement of their financings should be aware that Form Ds will be more readily available once electronic filing becomes mandatory. 

As many of you are know, the SEC published a separate rule proposal last fall to revise some of the substantive provisions of Regulation D, including the definition of "accredited investor." These rules have not yet been adopted.

Revisions To Form D Disclosure Requirements

As with current Form D, the new version of Form D will require the company to provide basic information about the issuer of the securities, the type of security being issued, the nature of the company’s business, the number of investors, and the securities law exemption being claimed.

Significant differences between the requirements of current Form D and new Form D include the following:

• New Form D will eliminate the current requirement to identify 10% owners of a class of equity securities.
• New Form D will require the company to select its industry group from a pre-determined list, instead of writing its own description.
• New Form D will request revenue range information; the company may choose a “decline to disclose” option.
• New Form D will include a new question asking whether the company expects an offering to last longer than one year.
• New Form D will modify the current requirement to provide information on sales compensation by adding a requirement to provide the name of every recipient of sales compensation and finders fees, the states in which they intend to solicit investors, and CRD numbers if the recipient is a registered broker-dealer.  Finders and others receiving sales compensation or finders fees who are not registered brokers or dealers will not be required to obtain a CRD number to receive the compensation, but must nevertheless be listed on the Form D. 
• New Form D will ask the company to identify the number of investors who have purchased in the offering, and the number of non-accredited investors.
• New Form D will modify the current requirement to provide Use of Proceeds information, so that the company will only have to provide the amount of proceeds used for sales commissions, finders' fees and payments to related persons.

New Rules on Amending Previously-Filed Form D

The existing rules are unclear with respect to when a previously filed Form D must be amended. The new rules clarify that an amendment will be required in only three situations:

• to correct a material error or mistake of fact on a prior filing;
• to reflect a material change in the offering; or
• one year after the initial filing, and once a year thereafter, if the offering is still continuing.

The new rules also provide that the following changes to the offering will not be deemed "material" changes requiring an amendment:

• a change in the address or relationship of a related person;
• a change in the company'srevenues or aggregate net asset value;
• an increase in the minimum investment amount, or a decrease from the original minimum of less than 10%;
• a change in the states in which an individual who is receiving sales compensation or finders' fees intends to solicit investors;
• a decrease in the total offering amount, or an increase from the original offering amount of less than 10%;
• a change in the amount of securities sold in the offering;
• a change in the total number of investors, or in the number of non-accredited investors, as long as the change does not increase the number of non-accredited investors to more than 35; or
• a decrease in the amount of sales commissions, finders' fees, or payments to related parties, or an increase in any of these payments of less than 10%.

Online Filing of Form D

The SEC is developing an online filing system for filing Form D that will be similar to the online filing system currently in use for Section 16 filings. The system will be accessible from any computer with Internet access.  The SEC anticipates that the new Form D filing system will permit users to save an incomplete form online for several days.  (The current Section 16 filing system does not have such a save feature.)

The electronic filing system for Form D is expected to be available September 15, 2008. Electronic filings of Form D will be accepted on a voluntary basis until March 15, 2009, when electronic versions of the new Form D will become mandatory.

A privately-held company that has not previously made electronic filings will need to obtain EDGAR codes from the SEC before making its first filing.  The company must by file its request on Form ID, which is available online at:  https://www.filermanagement.edgarfiling.sec.gov/.  Once the company has received its EDGAR codes, it may use the same codes for all electronic filings going forward.  There is no fee for obtaining these codes. For more information, see the FAQ's on the SEC website.