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The SEC’s Reg Flex Agenda has recently listed a rulemaking in the proposed rule phase identified as “Regulation D and Form D Improvements.” Last month, I speculated in the blog about what that rulemaking could involve, because to date we have not received much indication of what the Commission may be considering in terms of rule amendments.

Earlier this week at the Northwestern Pritzker School of Law’s Securities Regulation Institute, SEC Commissioner Caroline Crenshaw delivered the Alan B. Levenson Keynote Address and provided some important insights into the issues that the Commission may now be considering. Focusing on Rule 506 of Regulation D, Commissioner Crenshaw noted several areas of concern with the ubiquitous private offering exemption and the rise of unicorns that utilize the private offering exemption, including those related to investor protection, inflated valuations, corporate governance and the impact on small businesses. Concluding that Regulation D is not serving its intended purpose, Commissioner Crenshaw suggested the following potential areas for reform:

Form D. Commissioner Crenshaw suggests that Form D could be required to be filed prior to the time any solicitation under Regulation D is made, and failure to file a Form D could have actual consequences, such as the inability to rely on Regulation D in future offerings. She notes that the form itself could include useful, substantive information about a private company and could be required to be signed and certified by an executive officer.

A Two Tiered Exemption Like Regulation A. Commissioner Crenshaw suggests that the Commission could import a two-tiered framework, similar to that under Regulation A, which would impose heightened obligations on the larger private issuers and issuances. At a minimum, she suggests that large private issuers could bear heightened disclosure obligations at the time of the offering and on an ongoing basis. For example, large private issuers could be required to engage independent auditors and would have to provide prospective and committed investors with financial statements audited in accordance with GAAS, along with auditor opinion letters, confirming the adequacy of the company’s internal controls over financial reporting.

In conclusion, Commissioner Crenshaw noted:

To my mind, this is a tailored solution that helps us fulfill our mandates. First it imposes heightened obligations on larger private companies. In so doing we would both acknowledge Reg D’s purpose in allowing reprieve to smaller businesses, and also help eliminate the benefit and effective subsidy being given to large private issuers on the backs of these same small businesses. Second, it provides broader disclosure to investors, which acknowledges again that, even among a set of accredited and sophisticated investors, private market investors are entitled to a certain basic set of information.

These proposals could substantially change the way issuers utilize Regulation D, which is by far the most widely used exempt offering alternative.

– Dave Lynn