Investment Adviser and Private Companies Penalized for Failing to Timely File Form D
By Karen Liu, Reid & Wise LLC
On December 20, 2024, the U.S. Securities and Exchange Commission (the “SEC”) announced charges against a registered investment adviser and two private companies for failing to timely file Forms D with respect to unregistered securities offerings.
Pursuant to Rule 503 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”), any issuer relying on Rule 504 or Rule 506 of Regulation D must file with the SEC a Form D for each new offering of securities no later than 15 calendar days after the first sale of securities in the offering.
The three cases share similar fact patterns. For the case against the investment adviser, the securities issuers are the private funds under the adviser’s management. For the other two cases against private companies, the securities issuers are the two private companies themselves. In all the three cases, the issuers conducted unregistered offerings under Regulation D and also engaged in certain communications that constituted general solicitation for such offerings. The SEC reasoned that because the issuers “engaged in general solicitation, the offerings could not have been conducted as exempt offerings under Section 4(a)(2) of the Securities Act and therefore could not have been conducted without reliance on Rule 504 or Rule 506(c) of Regulation D,” which necessitates timely Form D filing with the SEC.
Private companies usually rely on Section 4(a)(2) of the Securities Act or Regulation D thereunder in onshore securities offerings. The SEC reiterates through the three cases that, if a private company engages in any general solicitation (such as through YouTube videos, social media posts, newspaper or online ads, and radio or TV broadcasts) in an onshore securities offering, it will automatically lose legal basis to rely on Section 4(a)(2) of the Securities Act and will have to file a Form D with the SEC no later than 15 calendar days after the first sale of securities in the offering. To avoid missing the deadline, an issuer is allowed to file a Form D at any time before that if it has determined to make the offering.
In the three orders, the SEC emphasized multiple negative effects that could result from Form D filing delays or failures:
- impeding the SEC’s ability to fully assess the scope of the Regulation D market;
- harming the SEC’s ability to monitor and enforce compliance with the requirements of Regulation D;
- hindering state securities regulators’ and self-regulatory organizations’ ability to monitor and enforce other securities laws and the rules of securities self-regulatory organizations; and
- impacting investors’ and other market participants’ ability to understand whether companies are complying with federal securities laws in their offerings, to do research and analysis on the Regulation D market, and to report on capital-raising in industries that use Regulation D.
The three cases highlight the significance of complying with the Form D filing requirements, especially for private companies, which are often less regulated and sometimes less sophisticated than public companies. The case against the investment adviser also signals the important role of fund managers in keeping private funds they manage complying with securities laws.
