Securities issuers and their counsel have historically relied on the fact that the SEC has not pursued enforcement actions against issuers that have not filed, or been delayed in filing, a Form D in connection with offerings that seek to rely on a Rule 506 safe harbor. Recent enforcement actions by the SEC may signal a critical shift that must be accounted for by responsible issuers and wise counsel. But given the current orientation of the federal government, we believe the near-term effects will be associated with state securities enforcement matters related to late filed Form Ds. In this alert, we discuss some of the primary concerns we are sharing with our issuer clients.
SEC Enforcement for Delayed Form D Filing
In late December 2024, as many of us prepared to unwrap presents and light menorahs, the SEC announced three highly unusual enforcement actions against private offering issuers relying on Rule 506(c). As a refresher, Rule 506(c) is one of the safe harbors associated with the exemption established by Section 4(2) of the Securities Act of 1933. It creates a framework for companies to raise capital via the issuance of securities in a private offering without the burdensome requirements associated with registering the subject securities with federal and state regulators. Unlike its sister safe harbor under Rule 506(b), Rule 506(c) allows the subject company to engage in “general advertising” (i.e., presenting the offering to persons with which the company does not already have preexisting, substantive relationships.) Amongst other criteria, both 506(b) and 506(c) require the filing of a Form D with the SEC. Most states require that issuers relying on a 506 safe harbor also file a copy of the Form D with their state if the company raises capital in the state.
Many companies understand – and to a degree, rely upon – two key facts:
- Failure to file a Form D with the SEC does not result in a loss of the safe harbor exemption under either 506(b) or (c); and
- Historically, the SEC has not pursued enforcement against companies that seek to claim reliance on a Rule 506 safe harbor yet have failed to file (timely or at all) a Form D with the SEC.
Common causes of an unfiled Form D include the lack of awareness by issuers and operational breakdowns with internal filing processes. But the dearth of historical enforcement by the SEC has also led companies and their counsel to occasionally factor business reasons in determining whether to file a Form D. The Form D is a public filing and would communicate information to the public, including competitors, about the entity’s effort to raise capital.
The recent enforcement actions by the SEC[1] are notable for the obvious reason that they represent a path not pursued regularly by the SEC as to late filed Form Ds. It is also notable is that the enforcement actions were related to issuers conducting 506(c) offerings, which are often more scrutinized by regulators because they permit the issuers to raise funds from persons with whom neither the issuers nor the relevant placement agents have a preexisting relationship. Finally, we observed that the fines imposed by the SEC ranged from $60,000 for an issuer that raised just over $1,000,000 in two private offerings[2] up to $195,000 for an issuer that raised “at least” $250,000,000 over several offerings.[3] Each matter likely involved numerous considerations and facts not addressed in the respective SEC orders, but the disproportionate impact on the smaller issuer is difficult to ignore.
It seems unlikely that the current SEC would approve enforcement actions where the sole issue is the failure to timely file Form Ds. Enforcement actions based on technical filing requirements are expected to be disfavored by federal leadership in the near term. However, if an issuer fails to timely file a Form D on an offering, the technical violation of the Form D could arise under a Gensler-like SEC in the future. Moreover, unlike the SEC, a number of state securities regulators have historically pursued enforcement and/or penalties for the late filing of Form Ds. As discussed below, we believe the SEC actions may increase the enforcement risk with state regulators.
Form D Filing Enforcement by State Securities Regulators
The vast majority of states require issuers relying on the Rule 506 safe harbors to file copies of their Form Ds upon raising capital in the state. The filing requirement is associated with the state’s parallel exemption for capital raised in reliance on Rule 506 and generally requires a fee, which varies by state.
Certain state regulators have historically pursued enforcement actions against issuers who fail to timely notice file with the state. Such enforcement actions have involved public orders fining the issuer[4], efforts to limit the issuers reliance on the state exemption, and other measures[5]. Some states even attempt to claim that a delayed Form D filing renders the Rule 506 exemption unavailable in their state.[6] If nothing else, this history demonstrates the strong positions that states have sought to take in instances of late Form D filings.
At the same time, the monetary penalties sought by state regulators generally pale in comparison to those levied in the recent SEC enforcement actions. Numerous factors, including statutory limits, have impacted the penalties in the state actions. Amongst such factors, the SEC’s lack of enforcement on delayed filings may have played a role in limiting state penalty demands. In turn, issuers should now prepare for the possibility that a state actually leans on the recent SEC enforcement actions to claim support for stronger penalty demands in the future.
Takeaways
- Failures to timely file Form Ds have historically not subjected issuers to enforcement penalties.
- To the extent issuers and their counsel relied on this lack of enforcement in measuring business considerations, the SEC’s recent enforcement actions may require them to reconsider their approach.
- Even if additional SEC enforcement actions for untimely Form D filing are not likely in the near term, issuers and their counsel would be wise to remain mindful of future SEC risk, but also, the possibility that the recent actions will energize state enforcement measures for untimely filings.
[1] https://www.sec.gov/files/litigation/admin/2024/33-11346.pdf;
https://www.sec.gov/files/litigation/admin/2024/33-11347.pdf;
https://www.sec.gov/files/litigation/admin/2024/33-11348.pdf.
[2] See Grid 202, LLC matter.
[3] See Pipe Technologies, Inc. matter.
[4] See Kentucky Department of Financial Institutions v. Miso Robotics, Inc. 2024 KY. SEC. LEXIS 9, 2024 KY. SEC. LEXIS 9 (imposing a $1,000 fine against an issuer that made a Form D filing 33 days after the date of its first sale).
[5] See In the Matter of: PEP Sailing Stone Ludlow, LP, 2024 OKLA. SEC. LEXIS 45, *1, 2024 OKLA. SEC. LEXIS 45 (entering a Stop Order to suspend an issuer from offering the securities in the state).
[6] While outside the scope of this discussion, we note that this position appears to lack support because securities sold in offerings that substantively comply with Rule 506(b) or (c) are “covered securities.” Nonetheless, issuers and parties (e.g., broker-dealers and investment advisers) should remain cognizant of the possible ramifications of a state claiming the 506 exemption was not available within the state.