TheCorporateCounsel.net

It’s long been an open secret that many Reg D issuers opt not to file a Form D for their offerings. One reason may be that the SEC hasn’t made non-compliance with Form D filing requirements an enforcement priority. That changed on Friday, when the SEC announced settled enforcement proceedings against three issuers that failed to make required Form D filings. This excerpt from the SEC’s press release explains the agency’s rationale for the actions:

An issuer’s failure to follow the requirements to file a Form D (or amend its existing Form D filing) impedes the Commission’s ability to fully assess the scope of the Regulation D market, which is key to the Commission’s understanding of whether Regulation D is appropriately balancing the need for investor protection on one hand and the furtherance of capital formation on the other, particularly as it relates to small businesses.

It also harms the Commission’s ability to monitor and enforce compliance with the requirements of Regulation D and the ability of state securities regulators and self-regulatory organizations to monitor and enforce other securities laws and rules. In addition, it hampers the ability of investors and other market participants to understand whether companies are complying with federal securities laws in their offerings, to research and analyze the Regulation D market, and to report on capital-raising in industries that use Regulation D.

Each of the issuers agreed to cease and desist from failing to comply with Rule 503 of Regulation D and agreed to pay civil penalties ranging from $60,000 to $195,000. In addition, the order in each of these actions points out that the offerings at issue involved general solicitation, which made the statutory Section 4(a)(2) exemption unavailable. (Keith Bishop has posted some thoughts on this topic over on his blog).

If the SEC’s goal is improved compliance with Rule 503’s filing requirement, then I think that in addition to “message cases” like these, the SEC should take a hard look at the information that it asks issuers to provide in a Form D. There’s a lot of stuff in there only a bureaucrat could love, and most issuers regard Form D as the Securities Act’s version of a “TPS Report.” But the bottom line is that if you don’t file a Form D, you’re not complying with the law, and you aren’t going to get a lot of sympathy from the Division of Enforcement.

One thing I’m not sure about is whether the cease-and-desist orders in these cases are regarded as an “order, judgment, or decree of any court of competent jurisdiction. . . enjoining such person for failure to comply with Rule 503. . . ” If so, the issuers also would be prohibited under Rule 507 from relying on Reg D absent a waiver from the SEC. My gut tells me that they are, but I’d think that’s something the SEC might highlight in its press release, which it didn’t do. If any SEC enforcement lawyers out there can enlighten me, I’d appreciate it – and I’ll update the blog.

– John Jenkins