On December 20, 2024, the SEC announced that it had settled with three companies in an enforcement proceeding based on these companies’ failures to file a Form D in connection with an exempt offering under Regulation D (see link here). 

Each of the companies had engaged in an offering that relied on general solicitation, i.e., advertising the offering publicly. Under Regulation D, general solicitation is permitted only under Rule 506(c), which exempts from registration an offering where sales are made only to accredited investors whose accredited status is independently corroborated, and under Rule 504, which sets out an exemption for an under $10 million offering which allows general solicitation in very limited circumstances.

These companies had raised amounts ranging from approximately $1 million to $250 million. The monetary penalties raged from $60,000 to $195,000. In each of the orders dealing with these violations, the SEC stated that the filing of a Form D is a requirement of Rule 503 of Regulation D, even though Regulation D interpretive guidance has made it clear that the filing is not a condition of the Regulation D exemption^[1]. The SEC focused on the information gathering function of the Form D, stating in its press release:

“Today’s orders find that the charged entities deprived the Commission and the marketplace of timely information concerning nearly $300 million of unregistered securities offerings.”

This was an unusual step for the SEC, and we have not been able to locate a single instance where a monetary penalty was imposed solely based on a failure to file a Form D^[2]. Indeed, even though Rule 507^[3] under Regulation D bars an issuer from using the Regulation D exemptions under Rule 504 and Rule 506(c) if it has been enjoined by a court order from violating Rule 503 resulting from a failure to file a Form D, we have not been able to locate any prior proceeding when this penalty was imposed either. The bar from using Regulation D was not imposed on the three issuers in the proceedings described in the SEC’s announcement as there was no court injunction that would be a predicate to doing so.

It is noteworthy that an offering that does not utilize general solicitation may also qualify under Section 4(a)(2) of the Securities Act of 1933 as amended, an exemption that Rule 506(b) of Regulation D is based on. In such a situation, the issuer could try to claim it did not need to file a Form D because Section 4(a)(2) does not require one. However, Rule 506(b) does not permit general solicitation and these offerings all used general solicitation per the recitations in the SEC’s orders.

While it has been understood that a failure to file a Form D does not cause an offering to fail to comply with Regulation D, the advantages of filing a Form D were clear before this recent enforcement action. First, it clearly establishes the issuer’s intention to utilize the exemption. Second, it allows for required state notice filings to be made, as these use the Form D as the basis for the state filing. Third, because Rule 506 offerings preempt state law on registration or qualification requirements, the filing of the Form D makes the issuer’s intentions clear in this regard to any State regulator. ^[4]

There has been a view expressed by some in the securities bar that the failure to file a Form D was a “no harm-no foul” omission. That is certainly no longer the case after the SEC’s enforcement action here.