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If you’ve worked on more than a handful of private placements over the years, you know that in many situations, issuers opt not to file a Form D with the SEC. I’ve heard a lot of reasons for that over the years, most of which seem to be one version or another of, “well, it’s not a condition of the exemption . .  .” followed by some kind of mutterings about confidentiality or concerns about sharing information with the “gubmint.”  However, Keith Bishop recently blogged about a new study that suggests another reason why issuers so often don’t file a Form D – the desire to avoid “patent trolls.”  Here’s the abstract:

We document that the majority of venture-capital backed financing rounds are not accompanied by a Form D filing. We show that filing behavior is predictable and is related to both the ability to fly below the radar and the benefits of withholding information. Financing rounds that are harder to hide, larger offerings and those previously covered by media, are more likely file a Form D while financing rounds by firms with greater proprietary information, early stage firms or companies in biotech, pharmaceutical, and high tech industries, are less likely to file a Form D.

We document one adverse outcome to the filing of a Form D, patent litigation, and show that protection from this type of litigation through the enactment of anti-patent trolling laws subsequently increases the rate of filing. Firms are less likely to file a Form D once the form is required to be filed on Edgar. Finally, we note that reliance on Regulation D is stronger as the firm nears an exit from the private market. Our results suggests that some firms view even minimal disclosure and regulatory oversight as costly.

Keith points out that one of the authors’ conclusions is that the Form D filing rate among California issuers is particularly low, and that these issuers typically don’t file a limited exemption notice filing at the state level either – which the authors suggest means that at least some issuers may be relying on Reg D as an exemption but not filing the form to ensure their privacy.

If you’re considering not making a Reg D filing, bear in mind a few cautionary points. First, although Securities Act Rules CDI Question 257.07 says that a Form D filing isn’t a condition of the exemption, it is still required by Rule 503. In addition, Rule 507 provides that failure to file a Form D may form the basis for disqualifying an issuer from using the exemption in the future. In addition to potential SEC enforcement proceedings, some states may get their noses out of joint if a state Form D isn’t filed and pursue enforcement actions of their own unless you’ve scoped out a non-filing exemption that you can hang your hat on.

– John Jenkins