Brace Yourself: New Form D Draws Near

Companies now have less than one month until Form D, one of the last paper filings still used by the Securities and Exchange Commission, staggers into the Internet era.

The change does not mean companies need to do anything differently right away; they will have the choice of filing Form D electronically as of Sept. 15, and electronic filing will become mandatory after March 16, 2009. But companies “should start thinking about all of the changes coming,” says Jeffrey Taylor, a partner in the law firm Blank Rome. “In the mad rush to complete an offering, Form D filings are often the last and most overlooked item on the checklist.”

The SEC amended its Form D rules last February. The revisions simplify issuers’ Form D paperwork, letting filers identify all issuers in a multi-issuer offering on one Form D filing and deleting a requirement to identify as “related persons” owners of 10 percent or more of a class of the issuer’s equity securities. The new rules also clarify when, how, and why an amendment to a Form D should be filed.

Taylor notes that the SEC will maintain “a two-universe system” from Sept. 15 until next March; during that period, companies will have the choice of filing a new Form D either on paper or electronically, or keep filing the old Form D (henceforth known as a “temporary Form D”). New annual and other amendment rules apply to all new Form D filings, regardless of format, and the current amendment requirements will apply to all current Form D filings in paper format. And once March 16, 2009 arrives, electronic filing of the new Form D will be the only choice.

Deciding whether to start using the new Form D now will be based largely on a company’s individual facts and circumstances, since both early adoption and waiting until next March have benefits and drawbacks.

DeMelis

“A lot of companies are likely to wait until last minute,” says Linda DeMelis, of the law firm Heller Ehrman. “There’s not really any perceived advantage to e-filing early, and it may be viewed as a slight administrative disadvantage.” That’s particularly true for private companies, which use Form D often, she says.

Likewise Taylor says he would be surprised to see much early adoption, since the new rules are “a bit of a change from business as usual” for private companies doing private offerings under Regulation D. Those companies haven’t previously been subject to the SEC’s e-filing requirements and may be jolted to see their financial data published on the EDGAR filing system immediately. “It’s out there for the world to see when you file it,” Taylor says.

Private companies doing private offerings under Regulation D may be jolted to see their financial data published on the EDGAR filing system immediately. “It’s out there for the world to see when you file it.”

— Jeffrey Taylor,

Partner,

Blank Rome

Form D information is publicly available right now, but only on paper at SEC offices. Making that information instantly accessible sooner than required may not hold much appeal for private companies that desire to “stay below the radar,” DeMelis says. Taylor suspects many companies will therefore stick with the paper filings until the last possible moment and may even structure transactions in early 2009 to allow a paper-based Form D filing before the March 16 deadline.

Sacks

Another administrative task for Form D filers: obtaining an EDGAR filing number so they can file electronically. The SEC has published guidance to walk filers through the process, and Taylor suggests companies try to get their filing numbers in advance to avoid any last-minute rush on SEC resources next March.

When Early Adoption Works

Administrative tedium and unwanted publicity aside, early adoption of the new Form D will make sense for some companies, experts say. For example, businesses with a large number of continuous offerings—venture capital firms, hedge funds, or private equity funds, for example—may want to consider compliance sooner rather than later “to establish a compliance rhythm,” says Russell Sacks, a lawyer with Shearman & Sterling.

Gittleman

Companies fitting that profile should determine in advance what Regulation D filings they have which are ongoing, says Charles Gittleman, also a lawyer at Shearman & Sterling. The new Form D rules will require companies with ongoing offerings to update Form D annually. “Develop an inventory of the transactions you want to preserve for the future and pay attention to your obligations,” says Gittleman.

Under the new rules, companies must amend their Form D filings for ongoing offerings under three circumstances:

FORM D-ETAILS

The following excerpt from the SEC’s, “Electronic Filing And Revision of Form D,” details Form D revisions.

We are revising Rule 503 and the instructions to and description of Form D to require

amendments to the Form D notice in the following three instances only:

1. To correct a material mistake of fact or error in the previously filed notice (as soon as

practicable after discovery of the mistake or error).

2. To reflect a change in the information provided in a previously filed notice (as soon as

practicable after the change), except that no amendment is required to reflect a change

that occurs after the offering terminates or a change that occurs solely in the

following information:

the address or relationship to the issuer of a related person identified in

response to Item 3 of Form D;

an issuer’s revenues or aggregate net asset value;

the minimum investment amount, if the change is an increase, or if the

change, together with all other changes in that amount since the previously

filed notice, does not result in a decrease of more than 10%;

any address or state(s) of solicitation shown in response to Item 12 of Form D;

the total offering amount, if the change is a decrease, or if the change, together

with all other changes in that amount since the previously filed notice, does

not result in an increase of more than 10 percent;

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;

the amount of sales commissions, finders’ fees or use of proceeds for

payments to executive officers, directors or promoters, if the change is a

decrease, or if the change, together with all other changes in that amount since

the previously filed notice, does not result in an increase of more than 10 percent

3. Annually, on or before the first anniversary of the filing of the Form D or the filing of

the most recent amendment, if the offering is continuing at that time.

Source

SEC Electronic Filing & Form D Revision (Feb. 6, 2008).

To correct a material mistake of fact or error;

To reflect a change in the information provided in a previously filed notice, except those changes specified in the rule as not requiring amendment; and

Annually, on or before the first anniversary of the filing of the Form D or the filing of the most recent amendment, if the offering is continuing at that time. That means for ongoing offerings with a Form D last filed before March 16, 2008, there’s a requirement to file a new form on March 16, 2009, Sacks says.

“That’s something new that most issuers today don’t think about,” Taylor says. He also notes that the requirements to update Form D apply to offerings made under Rule 506 that aren’t capital-raising, such as offerings of securities under employee benefit plans.

States’ filing requirements may also cloud the Form D picture. Until now, Taylor says, the old Form D pulled double duty to satisfy federal securities law and most states’ filing requirements for certain exemptions. The new Form D, however, has no “one-stop” filing system, so issuers still need to check and comply with state law rules, he says.

The SEC’s final rule notes that the Commission is exploring with the North American Securities Administrators Association the establishment a of a “one-stop shop” system under which companies could file Form D information both with the SEC and with states they designate in one electronic transaction. An SEC spokesman confirmed that the new system for Form D e-filing will be running by the Sept. 15 date for voluntary compliance, but he deferred questions about state regulators’ plans for e-filing to NASAA.

Mike Stevenson, a securities regulator for Washington State and a member of NASAA’s board, says NASAA is “working closely with the SEC to develop an electronic system for filing Form Ds with the state securities regulators.”

What form such a system might take or when it will be available, however, remains unclear. Stevenson says NASAA is “looking at several methods to allow for such e-filings,” but says no final decision has been made and the date for having the states’ system in place depends on the choice of the system.

However, Stevenson says “states will have the option to accept the new SEC form in several formats” as of Sept. 15.

Observers say the Form D changes shouldn’t require a lot of extra time to do the guts of the actual filing. “The information required shouldn’t be any harder to get than it is for the current form,” Taylor says.

“There could be some additional burdens and chances for additional hiccups” the first time companies go through the private-placement process under the new rules, he says, but “once do they do it once, it shouldn’t be that big a deal.”