Adapted from an article originally published by the author in Inc. Magazine.
When you are a mentor or board director to a company just finishing raising a round, it is tempting to take a breath and do a few high fives. But before you do, make sure someone has made the Form D filing with the federal and state securities regulators. This mandatory set of filings is very easy to do, but also very easy to forget. Put it on your punch-list for closings.
Not every investor realizes this, but even if a company does a completely private and exempt offering in the U.S., a filing with the Securities and Exchange Commission is required. In fact, these filings are how many journalists hear about the obscure private startup fundraises they cover. Many publishers of startup lists and databases get their data directly from the U.S. government.
What are these Form D filings? Under the Securities Act of 1933, any offering of securities in a company must either be registered with the SEC or qualify for an exemption to the registration requirement (see recent discussion in this crowdfunding article). Regulation D, commonly known as “Reg D”, is the most common place startups go for exemptions. Reg D includes Rules 504, 505, and 506, which if followed, allow companies to offer and sell their securities without having to register them.
However, the exemption does have one registration string attached. Any offering under Rules 504, 505, or 506, requires filing a Form D once funds are raised. Form D is a very simple filing. It includes company name, address, information about the officers, directors or promoters behind the filing, company industry, company revenue level, and offering details. It takes about five minutes to complete. Filing of Form D is required no later than 15 calendar days after the first sale of securities in the offering, and must be promptly re-filed if there are any changes to the information originally submitted. This one can be a gotcha; many companies don’t realize that if you increase the size of the round by more than 10%, you must immediately file an amended Form D.
Although a Form D filing is quick and easy, if the company forgets to file it, the company can lose its future eligibility for an exempt Reg D offering. Similarly, any mistakes, misstatements or omissions in an timely filed Form D could trigger a future exemption loss, unless the company can show that the mistake was insignificant in relation to the overall offering, was not related to an element of the form intended to protect the buyer of the securities, or was made despite a reasonable and good faith efforts to comply with the rules and correct the information. And an omitted or incorrect filing can greatly increase the chances of liability in state court if the offering becomes subject to litigation for some reason.
While taking care of the Form D filing, the company or its counsel should also double check the state law for the company’s home state, and any states in which its investors reside. Most of the time, for most offerings, the U.S. Federal securities rules will pre-empt the state rules, and nothing more than supplying the state regulators with a copy of the Form D filing is required. This is more true than ever since passage of the National Securities Markets Improvement Act of 1996 which attempted to further clarify and reduce overlap between state and federal rules. Nonetheless it is best to double-check because not every offering or every situation is preempted.
So, what’s the bottom line? When you are close to a closing, make sure the company has the Form D filing on its closing checklist and is ready to get it out the door well within 15 days of the first close. After that you can cue the cheer leading squad and celebrate your first close.