If a startup materially changes the structure of its financing, it might need to give its Form D a touch-up.
This post outlines what situations might require an “Issuer” of securities (e.g., a startup raising capital) to amend its Form D filing. Failing to amend a Form D when required can jeopardize the startup’s ability to use an important safe harbor to securities registration requirements. This can result in costly public registration of the offering and potential securities laws violations. The post also provides a brief reminder of the fraud liability exposure associated with any SEC filing (including Form D) or public statement made regarding an Issuer.
What is Form D?
When a start-up begins fundraising, the company typically offers for sale its securities (becoming an “Issuer” of the securities). In the world of start-ups, the Issuer primarily relies on the private placement exemptions to federal securities laws to avoid public registration of the offering of securities. The Issuer typically structures its offering through the SEC’s private placement safe harbor, Regulation D. Regulation D provides several options to structure an offering based on the specific nature of the offering. Even though each type of Regulation D offering has specific requirements, there are also universal obligations imposed on every company that relies on the safe harbor.
One of the universal requirements is for the Issuer to file a “Form D” with the SEC at the start of the offering through its EDGAR database. The Issuer’s Form D contains certain information about the company and the plans for the capital raised. And, because offerings can last for an extended period of time, the Issuer must generally keep its Form D up to date through the close of the offering.
Form D Amendments
After the Issuer files an initial Form D, an amendment may be filed at any time through EDGAR. The new filing should be marked as an “Amendment” under Section 7 of Form D: “Type of Filing.”
There are certain situations that require an amendment, and there are other scenarios where an amendment is optional (the latter referred to herein as the “Amendment Safe Harbor”). The easiest way to think about amendment filing obligations is as an umbrella requirement with several carve-outs, through the Amendment Safe Harbor.
Umbrella Requirement— Form D Amendments Must be Filed
1) Annually – on the 12-month anniversary of the most recently filed notice (if the offering is continuing).
2) Material Mistake – When a material mistake of fact or error has been discovered in the earlier filing and needs to be corrected, as soon as practicable.
- Under federal securities laws, “material” information typically refers to a fact, that, had an investor been aware of that fact, there would have been a substantial likelihood that its disclosure would have been viewed by a reasonable investor as having significantly altered the “total mix” of information made available. (TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976))
- Determining materiality is a factual analysis considered on a case-by-case basis. There is no bright line rule for when an issue becomes “material.” However, the SEC has provided some examples of circumstances that typically cross the materiality threshold.
- In the context of an early stage venture, there is little guidance as to what the SEC considers material and therefore requiring an amendment to a Form D filing. When determining if an update is necessary, it is important to think critically about how a “reasonable investor” would assess the information.
3) Other Changes – There has been a change in the information previously provided filing that needs to be corrected, as soon as practicable and subject to the Amendment Safe Harbor.
Amendment Safe Harbor—A change to the information contained in the previous filing does not require an amendment when it only refers to a change to:
- The company’s revenue or aggregate net asset value;
- Investment amount:
- An increase to the minimum investment amount;
- Any change to the minimum investment amount, that, together with all other changes to the amount since the previous filing, does not result in an decrease of more than 10%;
- Total offering amount:
- A decrease to the total offering amount;
- Any change to the total offering amount, that, together with all other changes in that amount since the previous filing, does not result in an increase greater than 10%;
- The amount of securities sold in the offering;
- The amount of securities remaining to be sold;
- The total number of investors who have invested in the offering;
- The number of non-accredited investors, so long as the change does not increase the total number to more than 35 total non-accredited investors;
- Payment Information:
- A decrease in the amount of sales commissions or finders’ fees;
- The amount of sales commissions or finders’ fees, 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%;
- A decrease in the amount of proceeds from the offering used for payments to executive officers, directors or promoters;
- The amount of proceeds from the offering used for payments to executive officers, directors or promoters, 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%;
- A sales person’s (that is, someone receiving sales compensation) address or states of solicitation; or
- A related person’s (as identified on the earlier Form D) address or relationship to the Issuer.
No Amendment Requirement—There is no requirement to file a Form D amendment to reflect a change that occurred after the offering ends.
Changes Outside the Safe Harbor – While the Amendment Safe Harbor is expansive, there are still some critical updates that do trigger an obligation to file an amendment. Notably, this includes:
1) When there are more than 35 non-accredited investors in an offering; and
2) When a greater than 10% increase in the amount of the offering proceeds are used to pay executive officers of the Issuer.
It would be good practice to check the Amendment Safe Harbor for a specific exemption in each instance rather than rely on the broad nature of the exemptions.
Fraud Liability in Connection to SEC Disclosures:
It is also important to remember that any information published or announced about the company is subject to the antifraud provisions of the securities laws (especially Exchange Act §10(b) and Exchange Act Rule 10b-5). This includes information included in SEC disclosures (like a Form D) or a public statement, whether written, verbal, or electronically transmitted.
Simply, to be in compliance, there should be no incorrect, incomplete, or omitted facts that would mislead an investor in any statement about the company (such as a fact included in a Form D Amendment). Suspicion of deception, manipulation, or fraud in connection with the sale of securities (both private and public offerings) can lead to private litigation and SEC enforcement actions.
Failing to amend Form D when required can create exposure to securities laws liability on two fronts:
- Through not adhering to Regulation D’s requirements for use of the private placement safe harbor; and
- By outdated/untrue information deceiving any investors in violation of the antifraud provisions.
These claims can be costly to defend and can also result in considerable penalties. As a result, ensuring that all information in the Issuer’s Form D is up to date and accurate is critical to remain in compliance and avoid crippling defense costs.
Especially in the context of private securities offerings, the obligations required to comply with securities laws can be complex and convoluted. As a rule of thumb, if you are confused about the application of the securities law in a certain scenario, you are not the only person who has posed this question. The best practice is to always check the written statutes, regulations, and other guidelines on the SEC’s website or consult with a securities law attorney.
The information in this memo was primarily taken and condensed from, “Filing and Amending a Form D Notice, A Compliance Guide for Small Entities and Others.” The SEC’s staff created this page as a guide. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rules can provide complete and definitive information regarding its requirements.