What is a Form D and when should it be filed?

TL;DR: A Form D permits a company to sell unregistered securities by claiming an exemption from registration. It should be filed with the SEC no later than 15 days after the date of the first sale of securities in the offering.

A Form D is a form that must be filed with the U.S. Securities and Exchange Commission (SEC) when a company, like a private start-up selling preferred stock to venture capital investors, sells unregistered securities. The form is used to claim exemption from registration under Regulation D. The form and its instructions can be found here on the SEC’s website.

The Reg D Exemption in More Detail:

Typically, venture-backed private companies take advantage of Regulation D safe harbors under Rule 506(b), Rule 506(c), or Rule 504.

• Rule 506(b)
  • Allows for an unlimited amount raised from an unlimited number of “accredited investors” and up to 35 “sophisticated purchasers.”
    • “Accredited investors” are individuals who have either 1) income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years and reasonably expects the same for the current year; OR 2) a net worth over $1 million, excluding primary residence.
    • “Sophisticated purchasers” are those with sufficient knowledge or experience in relevant financial and business matters to make them capable of understanding and evaluating the risks of their investment.
  • However, general solicitation (publicly advertising or promoting the sale of the securities) is prohibited, and the company must disclose certain information to any unaccredited investors.
  • Most VC financings use the Rule 506(b) exemption.

• Rule 506(c)
  • Allows for an unlimited amount raised to accredited investors only and requires that the issuer take steps to confirm accredited investor status
  • General solicitation is allowed, and the company is not required to disclose information to investors
  • Often used when a company is raising capital from the general public (sometimes referred to as “crowdfunding”)

• Rule 504
  • Price of offering cannot exceed $10 million, reduced by all securities sold in the past 12 months under Rule 504
  • Unlimited number of purchasers; no information disclosure requirements
  • General solicitation is allowed only if permitted under state Blue Sky Laws

Information Required to Complete the Form D:

• Basic identifying information of the company
• The provision that the company is relying on for exemption from registration (e.g., Rule 506(b))
• Other information related to the transaction, including the type of security offered, the total amount raised, use of the proceeds, and gross proceeds paid to the company’s directors, officers and promoters

Your legal counsel will help ensure that you meet the requirements to claim an exemption in your securities offering.

In addition, your counsel can help your company with the SEC’s online filing process, which includes obtaining a CIK number and filing the Form D via EDGAR.

• EDGAR is the SEC’s Electronic Data Gathering, Analysis, and Retrieval system, which is the system through which companies and others make required filings with the SEC.
• A CIK is a filer’s Central Index Key, which is used on the EDGAR system to identify corporations and individual people who have made filings.

It is important to note that it can take several days to obtain a CIK number, so first-time filers must be prudent about obtaining a CIK in time to meet the Form D filing requirement (no later than 15 calendar days after the date of first sale).

Consequences of Failing to File a Form D:

• A company may be prohibited from relying on registration exemptions in the future.
• The sale of securities may have to be rescinded and possibly reissued.
• Future investors may be turned off due to lack of credibility and red flags that a missed Form D can raise related to deficient corporate governance.

It is also important to amend your Form D filing if additional securities are sold beyond what was originally disclosed.

While Regulation D covers federal securities laws, each individual state also imposes requirements for the sale of unregistered securities. For more information, see “What are ‘Blue Sky Laws?”

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