Faster, Better Form D Filings on the Way?

Form D, one of the workhorse documents in financial reporting, is poised to get a major overhaul that will push it into the electronic era for good.

The Securities and Exchange Commission has proposed revamping Form D entirely, adding some new disclosures and eliminating some old ones. Companies would also be required to file the document electronically, making its contents more easily accessible to the public.

Under SEC rules, companies that rely on a registration exemption for private or limited offerings of securities provided under Regulation D must file a Form D after they first sell their securities. Form D notification must be filed within 15 days after the first sale of securities in an offering, a deadline that would not change under the SEC’s proposed reforms.

The most significant change, securities experts say, would be filing Form D electronically.

Perkins

“Traditionally, the Form D was filed, and from a practical perspective, it wasn’t really clear anybody looked at it,” says Eric Perkins, a principal in the law firm Hirschler Fleischer. “With the new proposed electronic filing system, the data will be more easily analyzed and easy to search and review.”

David Feldman, of the law firm Feldman Weinstein & Smith, agrees that the electronic filing of Form D would be a “positive.”

“You could always obtain a Form D, but most people didn’t bother,” says Feldman. Since they’re filed on paper, copies of Form D filings are only available from the SEC in person in its public reference room or by mail request, or through private vendors.

The rule proposal is part of a broad package of measures first announced by the SEC in May that intended to ease the raising of capital and the financial reporting requirements for smaller companies. The comment period on the proposed changes to Form D ended last week and drew only a handful of responses.

Feldman

While Feldman says the proposed revisions to Form D may appear “to just be procedural,” he says, “They’re more valuable than that.”

For starters, the changes could halve the time it takes to file a Form D, he says. Historically the form “has suffered from being awkward and frustrating in the past,” he says. Proposed reforms such as abolishing the current requirement to identify 10 percent holders of a class of equity securities and a requirement to estimate the use of proceeds of the offering, would be “a big plus” to simplify the form, he says.

The revised form would include 14 numbered items. “Items that typically were of questionable relevance and took the most time to compile and analyze have been removed,” Perkins says. The revised form “cuts to the heart of the essential information about an offering under Reg D that will be helpful.”

Another departure is that the proposed new Form D would allow multiple issuers in multiple issuer offerings to file one Form D and eliminate duplicative filings, Perkins says. That change would be particularly helpful in securitized tenant-in-common offerings, he notes, since they are often structured to have two issuers and so require the filing of separate forms.

Under the proposal, a question would be added about the issuer’s revenue range, but companies could decline to provide that information. The revised form would also require issuers to indicate whether the offering is being made in connection with a business combination transaction.

Going Online

Currently, issuers must file five paper copies of the form with the SEC by mail or by physical delivery to Commission headquarters. Under the proposal, issuers would be required to file the Form D information electronically through a new online filing system accessible from any computer with Internet access. The SEC noted in its proposing release that issuers that don’t already have an EDGAR access code would need to apply for one to file electronically. The Form D data would be publicly available on the SEC Web site and would be interactive and searchable.

The SEC received 25,239 Form D filings in fiscal 2006, and roughly 95 percent of the companies filing them were private companies.

The SEC also suggests in its proposing release that the costs and burden associated with preparing and filing the form could be cut further if state regulators decide to accept electronic filings of Form D notices with the SEC.

“It is our hope that state securities regulators would permit ‘one-stop’ filing with the Commission and rely on Commission filings as satisfying state law filing requirements for offerings covered by a federal Form D filing,” the SEC rule proposal states. Whether state regulators would go along with that idea, however, remains to be seen.

“I don’t think it’s something all states will immediately embrace, but there may be an evolution toward a single filing system for these types of offerings.”

— Eric Perkins,

Principal,

Hirschler Fleischer

While such a move would benefit issuers, Feldman doesn’t expect state regulators to jump on the idea, since the current reporting regime lets them collect filing fees. “My hope is that there will be some sort of compromise, maybe where companies would still pay the state fee but would only need to file the form with the SEC,” he says.

Perkins also says a move to one-stop filing “would be helpful,” but agrees that isn’t likely to happen overnight. “I don’t think it’s something all states will immediately embrace, but there may be an evolution toward a single filing system for these types of offerings under Reg D,” he says.

Feldman also notes that the proposal would add a requirement to provide a Central Registration Depository number—a number that state regulators and the National Association of Securities Dealers use to identify brokers and broker-dealers—for every intermediary involved in the transaction. That may raise some concerns, he says, since “it suggests that nobody other than a registered broker should be an intermediary in a transaction,” and some unregistered brokers collect consulting fees when companies raise money through private or limited offerings.

Meanwhile, a separate proposal also related to Regulation D, which was published for comment by the SEC in August, would create a new registration exemption for offers and sales of securities to a new category of “large accredited investors.” It would also permit limited advertising in exempt offerings to investors that meet that definition and would revise the term “accredited investor,” among other things. That proposal is out for comment until Oct. 9.