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Proposed Rules Changes to Form D
The proposed rules amend Rule 503 by expanding and adding content requirements in Form D and also by increasing the frequency of the Form D filing requirements . Expanded information required includes , without limitation , control person and promoter information , disclosure of whether the Form D filing itself is an “ advance-notice ” or a “ termination ” Form D ( detailed below ), specification of the number of accredited and non-accredited investors and the amount raised from each , and details as to intended use of proceeds . Newly-required information includes number and types of participating accredited investors , specifics as to the form ( s ) of general solicitation used or to be used ( mass mailings , emails , public websites , social media , print media , broadcast ), and identification of the method ( s ) used or to be used to verify accredited investor status in a Rule 506 ( c ) offering .
The frequency of the Form D filing obligation is proposed to be increased from one time to three or more times . Generally , a new “ Advance Notice ” Form D is due 15 days prior to use of general solicitation in a 506 ( c ) offering , disclosing less information than the full amount of information required by Form D . Subsequently , an amended Form D would be required to amend the advance-notice Form D , due ( a ) no later than 15 days after the first sale to provide all the information required by Form D that could not be included in the advance-notice ; ( b ) as soon as practicable to disclose a material mistake , error , or material change ; ( c ) annually , for continuing offerings , on or before the first anniversary of the most recent previously filed notice ; and ( d ) a termination amendment within 30 days after termination of the offering ( for all offerings ). Form D amendments are required to include information about the remaining disclosure items not applicable to an advance-notice Form D , including offering amount , total amount of securities sold , types of general solicitation used , and the methods used to verify purchasers ’ accredited investor status .
Expanded Issuer Disqualification
Currently , Rule 507 disqualifies an issuer from relying on Regulation D if the issuer has been enjoined by a court for violating the Rule 503 ( Form D ) filing requirements . The proposed rules would amend Rule 507 to further disqualify an issuer , for one year , from conducting any follow-up on Rule 506 offerings if the issuer , its predecessor , or affiliate did not comply at any time in the preceding five-year period with the Form D filing requirements .
This additional disqualification would apply to future offerings , beginning on the date a missed filing was due , with only a single 30-day cure period to file a missed Form D or to amend an erroneous Form D permitted per offering . Finally , proposed amended Rule 507 would make Rule 506 unavailable if a court took injunctive action against the issuer or a failure to comply with either Rule 509 or Rule 510T ( discussed below ).
Additional Legends Required for Sales Materials Proposed new Rule 509 would require that legends be included in written solicitation materials for offerings made in reliance on 506 ( c ), disclosing that only accredited investors are permitted ; the offering is exempt from registration and need not comply with the disclosure requirements ; the SEC has not approved the offering or the materials ; the securities purchased are restricted ; and purchasing the securities involves risk , and that investors should be able to bear the loss of the investment .
Requirement to Submit Marketing Materials to SEC Proposed new Rule 510T , to be effective for two years following adoption , would compel the submission by a 506 ( c ) issuer of its written general solicitation materials to the SEC no later than the date of first use of the materials . The failure to submit the materials would disqualify the issuer from relying on Rule 506 in the future . This rule echoes FINRA ’ s new Rule 5123 requiring broker-dealers to report and upload offering materials when engaging a placement agent for a private placement .
“ Bad Actor ” Disqualification
The proposed rules also include “ bad actor ” disqualifications , requiring an issuer to use reasonable care to ensure that no “ covered person ” ( including any director , officer , manager , significant owner , selling agent , underwriter , or placement agent ) with a “ disqualifying event ” ( a conviction of , or subject to court or administrative sanction for , securities fraud or other violations ) participated in the offering . An issuer that fails this standard will lose its securities law exemption .
Practical Effect if Proposed Rules Become Final : What Steps to Take ?
The proposed rules cloud , with significant regulatory ambiguity , the easing of Regulation D by the final rules . Along with the new marketing freedom come several potential compliance and liability dangers . Although Chairman White indicated there may be a transition period for 506 ( c ) offerings commenced prior to the finalization of the proposed rules , there is no guarantee that the proposed rules will be finalized as proposed , or that they will not be retroactively applied . Assuming the proposed rules are finalized substantially as proposed , to determine whether to rely on new Rule 506 ( c ) issuers must also carefully consider the following issues :
Implement Timing and Disclosure Due Diligence Procedures for Revised Form D : To avoid the one-year prohibition of relying on Rule 506 , issuers need to implement policies and procedures to ensure Form D filings are timely and completely made . The additional information required by the proposed rules could subject an issuer to expanded SEC inquiry and potential disclosure liability , particularly if the Form D conflicted with information in the offering documents ( a real danger , given the participation of differing persons in accomplishing different steps ).
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