Electronic Filing of New Form D

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1 Electronic Filing of New Form D January 2009 This Stroock Special Bulletin summarizes recent amendments to Rule 503 of Regulation D under the Securities Act of 1933 (the 1933 Act ), and describes the new version of Form D ( New Form D ) and the requirement to file New Form D electronically with the Securities and Exchange Commission (the SEC ) beginning March 16, Background Regulation D allows the sale of securities by issuers without registration under the 1933 Act and creates a safe harbor for private placements. Rule 506 of Regulation D delineates the requirements for private placements under Section 4(2) of the 1933 Act for offerings not involving any public offering and is relied upon by many issuers, including hedge funds and other private investment companies. Following adoption of the National Securities Markets Improvement Act of 1996 ( NSMIA ), reliance on Rule 506 of Regulation D also results in the preemption of state securities registration requirements, although the states are permitted under NSMIA to require a notice filing on Form D, a consent to service of process and a filing fee. In June 2007, the SEC proposed to establish an electronic filings system with the stated goal of establishing a one-stop filing system for SEC and Blue Sky Regulation D notice filings to ease filing burdens and improve the information collection process. In December 2007, following a comment period, the SEC voted to revise the content and require electronic filing of Form D. This was the first change to Form D made in over twenty years. In February 2008, the SEC published its final rule release (Release No ) detailing New Form D and the requirements for electronic filing. Electronic filing began September 15, 2008 on a voluntary basis. From now through March 15, 2009, issuers may elect to file New Form D, either electronically or in paper format, or Temporary Form D, which is identical to current Form D, except for the addition of the word Temporary. stroock & stroock & lavan llp los angeles new york miami 2029 century park east, los angeles, ca tel fax

2 Beginning March 16, 2009, New Form D must be filed with the SEC electronically. Filing will be made through an online system and issuers must obtain the same codes that are required for filings made on the SEC s electronic filing system, EDGAR. Once filed, the data will be publicly available on the SEC s Web site and will be interactive and searchable. Summary of Changes to Regulation D New Amendment Filing Requirements Rule 503 was amended to clarify that amendments to Form D are required in the following three instances: To correct a material mistake of fact or error in the previously filed notice (as soon as practicable after discovery of the mistake or error); To reflect a change in the information provided in a previously filed notice (as soon as practicable after the change), except that no amendment is required to reflect a change that occurs after the offering terminates; and Annually, on or before the first anniversary of the filing of the Form D or the filing of the most recent amendment, if the offering is continuing at that time. An issuer filing an amendment to a previously filed Form D must provide current information in response to all items of New Form D, regardless of why the amendment is being filed. When Amendments Are Not Required An issuer is not required to file an amendment to a previously filed Form D notice to reflect a change that occurs after the offering terminates or a change that occurs solely to the following information: The address or relationship to the issuer of a related person identified in response to Item 3; An issuer s revenues or aggregate net asset value; The minimum investment amount, if the change is an increase, or if the change, together with all other changes in that amount since the previously filed notice, does not result in a decrease of more than 10%; Any address or state(s) of solicitation shown in response to Item 12; The total offering amount, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%; The amount of securities sold in the offering or the amount remaining to be sold; The number of non-accredited investors who have invested in the offering, as long as the change does not increase the number to more than 35; The total number of investors who have invested in the offering; The amount of sales commissions, finders fees or use of proceeds for payments to executive officers, directors or promoters, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%. New Form D: Summary of Changes to Previous Form Addition of the date of first sale to New Form D. The date of first sale must be reported on New Form D. Under the instructions to New Form D, the SEC has declared that the sale date is the date on which the investor is irrevocably contractually committed to invest in the offering, a departure from past practice, which has been that the date of first sale is the 2

3 date of the initial closing. Depending on the terms of the contract, the date of first sale could be the date on which the issuer receives the investor s subscription agreement or check. Because the filing of Form D is not a condition to the exemption, a late filing does not take away availability of the exemption. However, because a few states have adopted new rules setting higher filing fees for late filings, focusing on the sale date will be important. This development might result in a conservative practice of pre-filing Form D with the SEC and with the states to avoid issues involving late filings. Elimination of the requirement to report beneficial owners of the issuer. It will no longer be required to list 10% or greater beneficial owners of any class of the issuer s equity securities. Requirement to provide industry group information. This replaces the requirement to provide a business description and is done by selecting an industry group from a pre-established list. Issuer must report revenues or asset value. Revenue range information for operating companies and net asset value for Hedge Funds and Other Investment Funds must be disclosed. However, there is an option to decline to disclose. Investment Company Act exemption. Investment companies that rely on an exemption from Investment Company Act registration pursuant to Section 3(c) of the Investment Company Act must state the specific exemption upon which they are relying. Brokers and finders. The CRD numbers of all U.S. registered broker-dealers participating in the private placement of the issuer s securities must be listed on the New Form D and the names and addresses of all finders must be disclosed. Some states will question whether a person listed as a finder ought to be registered as a broker or agent in their jurisdiction and is cause for concern. Undertaking to file offering materials. The signature page of the New Form D will include an undertaking to provide offering materials to the SEC and the states upon request. Retroactive Application and Transition Rules Issuers that have a currently filed Form D become subject to annual and other amendment requirements effective March 16, 2009, provided they are conducting an ongoing offering at that time. The SEC has implemented transition rules relating to this retroactive effect: From September 15, 2008 through March 15, 2009, an issuer may file either on paper, using Temporary Form D (which is identical to current Form D, except for the addition of the word Temporary ), or New Form D, or electronically on New Form D. From September 15, 2008 through March 15, 2009, the new annual and other amendment rules will apply to all Form D filings (i.e., those made after September 15, 2008), regardless of format. The current amendment requirements (i.e., must file an amendment only for a material change ) will continue to apply to all Form D filings made prior to September 15, On March 16, 2009, the annual and other amendment requirements will apply to all prior Form D filings provided that the offering is ongoing. Issuers that previously filed a Form D and have a continuous offering must determine whether an amendment should be filed under the new rules and if so, must file an amendment at least once a year until the offering terminates. 3

4 Blue Sky Laws Under NSMIA, state securities laws relating to registration or qualification of securities are preempted with regard to a private offering made in accordance with Rule 506 of Regulation D. However, as noted, Section 18(c) of the 1933 Act allows the states to require notice filings, a consent to service of process and filing fees in connection with Rule 506 offerings. State regulators and the SEC are working together to conform state filings to the new SEC procedure, but a one-stop electronic filing process will not be in place by March 2009 when the new SEC rules become mandatory. Accordingly, paper submissions will continue to be filed with the vast majority of states until the proposed new electronic filing process is available. On September 15, 2008, the State of Washington became the first state to issue a rule addressing the new SEC requirements. Washington Rule WSR requires reporting of the date of the first sale and amendment filings to be made in the same circumstances as required by the SEC. More recently, Connecticut, Illinois, Kansas, Missouri, North Dakota, Texas and Vermont have published rules or other guidance as to how issuers should comply with Rule 506 notice filings. These states require an issuer to file either a paper copy of Temporary Form D or New Form D during the transition period, and will require a paper copy of New Form D after March 16, No state is yet prepared to accept an electronic filing. The procedures established by the states listed above vary as to whether a separate consent to service is required, whether amendment or renewal filings are required, and whether additional filing fees will be imposed for late filings. Several aspects of compliance with blue sky laws are unclear at this time: Whether the states will accept a photocopy of New Form D as filed electronically with the SEC or if the states will continue to require manual signatures. Whether a consent to service of process will continue to be filed as a separate manually signed document. Whether the states will allow multiple issuers to file on one Form D as allowed by the SEC, or will continue to require separate Form Ds for each issuer, thereby preserving state filing fees for all issuers in a multiple issuer offering. Whether the states will require amendment filings and annual filings for all newly filed Form Ds. Whether the states will apply the amendment and annual filing requirements to Form D filings made prior to September 15, 2008 for ongoing offerings. Whether the states will impose late filing penalties and/or termination requirements. New Hampshire recently adopted a rule imposing rather substantial penalties for issuers that do not file a termination or a renewal after a one-year notice period. The North American Securities Administrators Association ( NASAA ) formed a working group consisting of five state regulators and two consultants to address these issues and to promote uniformity among the states. At the moment, the group is exploring options for establishing the one-stop electronic filing system contemplated by the new SEC rules. Most blue sky practitioners expect the process of uniform adoption of state filing require- 4

5 ments and establishment of the electronic filing system to play out over the next few years. In the meantime, the ABA Committee on State Regulation of Securities is working to compile a database of the individual state requirements as the transition process continues. Compliance Process Issues - Electronic Filing of Form D Paper filings of Form D with the SEC will be eliminated on March 16, As of March 16, 2009, all Form D notice filings must be made electronically on New Form D via EDGAR. The electronic filings contain typed signatures, but each signatory must also manually sign a signature page before the electronic filing is made. The issuer must maintain the manually signed document for five years and make it available to the SEC upon request. To file Form D electronically, an issuer must obtain the same codes as are required to file on the SEC s electronic filing system, EDGAR. The SEC published Division of Corporate Finance Guidance on Form D Filing Process on September 12, 2008 (the Guidance ). The Guidance details the necessary steps to obtain the EDGAR codes to make initial filings electronically, as well as the codes needed to convert filings made originally in paper format so that issuers making continuous offering can make annual and amendment filings electronically as required after March 16, The Guidance is posted on the SEC s website. A copy of New Form D is available on the SEC website at /formd.pdf. For an Item-by-Item description of the content changes to New Form D, see Attachment A to this Stroock Special Bulletin. By Sarah R. Davidoff (sdavidoff@stroock.com), Hillel M. Bennett (hbennett@stroock.com), Gary L. Granik (ggranik@stroock.com), and Katherine Neville (mneville@stroock.com), of the Private Fund s Practice Group of Stroock & Stroock & Lavan LLP. If you have questions regarding this Stroock Special Bulletin, the New Form D, or the requirement to file New Form D electronically with the SEC, please feel free to contact Ms. Davidoff, Mr. Bennett, Mr. Granik, or Ms. Neville. 5

6 Attachment A Item by Item Description of New Form D - Content Change New Form D consists of 16 numbered items or categories of information. A brief summary of changes is noted below. Item 1 Issuer s Identity New Form D generally requires the same type of issuer contact information, but allows for the identification of multiple issuers in a multiple-issuer offering, thereby eliminating the requirement to file duplicate notices. However, some states may require a separate filing for each issuer or security sold. Item 2 Principal Place of Business and Contact Information. Filers must provide place of business and telephone contact information, but new Form D will not allow post office box numbers and care of addresses to be used as a place of business. In a multiple issuer offering, information for the primary issuer identified in response to Item 1 is sufficient, but the issuer may include contact information for each issuer identified. Item 3 Related Persons New Form D no longer requires issuers to provide information about related persons to the extent that such person is a holder of 10% or more of a class of the issuer s equity securities. Item 3 of Form D requires disclosure of related persons who are promoters or are the issuer s executive officers and directors, based on the functions they perform. Item 4 Industry Group New Form D requires issuers to identify their industry group from a specified list. A description of the issuer s business will no longer be required. Item 5 Issuer Size New Form D requires all issuers to disclose either revenue range or aggregate net asset value information, based on the most recent fiscal year, or choose the Decline to Disclose or Not Applicable option. If an issuer has been in existence less than a year, it may identify its revenues to date. Item 6 Identification of Claimed Exemption and Exclusion The exemption or exemptions being claimed for the offering (i.e. Rule 504, 505 or 506 and Section 4(6), as applicable) continue to be required. In addition, the issuer must identify the paragraph of Section 3(c) of the Investment Company Act claimed for exclusion from the definition of investment company under the Investment Company Act. Item 7 Type of Filing (including date of first sale) New Item 7 requires the issuer to specify in a new filing the date of first sale or indicate that the first sale has yet to occur. The instructions define the date of first sale as the date on which the first investor is irrevocably contractually committed to invest. Under the new instructions, depending on the terms and conditions of the contract, the date of first sale could be the date on which the issuer receives the investor s subscription agreement or check. Item 8 Duration of Offering New Item 8 requires the issuer to indicate whether it intends the offering to last more than one year. 6

7 Item 9 Type of Securities Offered New Item 9 continues the requirement to specify the type of securities being offered. Item 10 Business Combination Transactions New Item 10 requires the issuer to indicate whether the offering is being made in connection with a business combination such as an exchange (tender) offer, or a merger or acquisition. Item 11 Minimum Investment Amount New Item 11 requires the issuer to specify the minimum investment amount that will be accepted from any outside investor. Investors are considered outside investors if they are not employees, officers, directors, general partners, trustees (where the issuer is a business trust), consultants, advisors or vendors of the issuer, its parents, its majority-owned subsidiaries, or majorityowned subsidiaries of the issuer s parent. Item 12 Sales Compensation New Item 12 adds a requirement to provide the Central Registration Depositary ( CRD ) number of each person that is a compensation recipient named in response to Item 12, provided the person has a CRD number. Item 13 Offering and Sales Amounts New Item 13 requires the issuer to provide the dollar amount of total sales, if any have occurred, and the total dollar amount of the offering. (An issuer may check the indefinite box.) Item 14 Investors New Item 14 requires an issuer to disclose whether securities have been or might be sold to persons who do not qualify as accredited investors, and the number of persons, whether accredited or nonaccredited, who already have invested. Item 15 Expenses and Use of Proceeds of Offering New Item 15 eliminates disclosure related to offering expenses and use of proceeds, requiring disclosure only of the amounts paid for sales commissions and, separately stated, finders fees. Clarification is allowed to prevent the information from being misleading. Item 16 Use of Proceeds New Item 16 requires the issuer to disclose the amount of gross proceeds the issuer proposes to use for payments to related persons. Clarification is allowed to prevent the information from being misleading. Signature and Submission New Form D combines the federal and state signature requirements into one signature block and incorporates a consent to service of process similar to the one currently used in Form U-2. The signing individual must sign with a typed signature; and manually sign a signature page (or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form in the Form D filing) on or before the time of filing the Form D. Each issuer must retain the manually signed document signed on its behalf for five years; and provide a copy of the manually signed document to the SEC or its staff upon request. The electronic signature found on new Form D includes an undertaking to provide offering materials, upon request, to the SEC and to any state in which a filing is made. The Form also notes that states may not routinely ask for offering materials, but may do so in the exercise of their anti-fraud powers. Free Writing The new Form D will permit issuers to engage in a limited amount of free writing to the extent necessary to clarify certain responses. 7

8 Los Angeles 2029 Century Park East Los Angeles, CA Tel: Fax: New York 180 Maiden Lane New York, NY Tel: Fax: Miami Wachovia Financial Center 200 South Biscayne Boulevard, Suite 3100 Miami, FL Tel: Fax: This Stroock Special Bulletin is a publication of Stroock & Stroock & Lavan llp 2009 Stroock & Stroock & Lavan llp. All Rights Reserved. Quotation with attribution is permitted. This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome. Stroock & Stroock & Lavan llp is a law firm with a national and international practice serving clients that include investment banks, commercial banks, insurance and reinsurance companies, mutual funds, multinationals and foreign governments, industrial enterprises, emerging companies and technology and other entrepreneurial ventures. For further information about Stroock Special Bulletins, or other Stroock publications, please contact Richard Fortmann, Senior Director-Legal Publications, at

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