Companies selling securities are generally required to register the offering with the Securities and Exchange Commission (SEC). In certain circumstances, an offering may qualify for an exemption from these registration requirements. One such exemption arises under Regulation D under the Securities Act of 1933, as amended (17 CFR Section 230.501 et seq.). To use this exemption, companies must file a “Form D” with the SEC after the first sale of the securities. Form D is a short notice that includes information about the company and the offering.
While brief, Form D does require disclosure of what a company may consider to be confidential strategic business information, such as the identities of board members and executive officers, the total offering amount, date of the first sale in the offering, type of securities being offered, number of investors, minimum size of the investment accepted from any outside investor, the number of unaccredited investors purchasing in the offering, and how much of the proceeds will be used to pay executive officers, directors or promoters. Issuers can check a box to “Decline to Disclose” the company’s revenues or the value of its aggregate net assets. The rest of the information cannot be withheld.
The SEC requires Form D to be filed on the Electronic Data Gathering, Analysis and Retrieval or “EDGAR” system. The EDGAR database is public, so all of the information a company provides on Form D is publicly disclosed upon filing. EDGAR is routinely harvested for information about private companies that may not be available elsewhere. Such information is regularly publicized and analyzed.
Companies should be aware of the public nature of Form D. Most private companies are sensitive to publicity and prefer to manage disclosures carefully. In particular, many of our early stage clients prefer to operate in stealth mode until they are ready for a fully-orchestrated launch. Early disclosure of fundraising activities to competitors or the investment community at large could put them at a competitive disadvantage.
Regulation D is not the only valid exemption from the registration requirements of the Securities Act. Companies may be able to rely on other exemptions, such as Section 4(a)(2) of the Securities Act, for which filing a public notice is not required. However, a downside to this option may arise on the state level. Companies must also comply with the securities laws of the states in which the companies and their investors are located. Many states provide exemptions from registration for issuers who file Form D. Otherwise, companies may face more burdensome state requirements, such as filing a lengthy application for an exemption from state registration.
Confidential treatment could be made available for portions of Form D to address these disclosure concerns while preserving the benefits of filing the Form D on the federal and state level. Companies may currently apply for confidential treatment for confidential commercial or financial information contained in material contracts required to be filed with the SEC. Noteworthy is that the information may not be in the public domain, even by mistake, to qualify for confidential treatment.
To facilitate confidential treatment, Form D could simply have additional check boxes where a company could “Decline to Disclose” and, as with other public filings where confidential treatment is available, confidential portions could be submitted separately to the SEC to ensure compliance with Regulation D. Companies could use the same process with state regulators or make a paper filing of an unredacted Form D. In this way, the SEC could continue to ensure compliance with Regulation D while companies could preserve the confidential nature of strategic business information. This would likely encourage more widespread use of Form D, enabling government agencies to collect more data about the start-up community.
The protection of the confidential strategic business information is on the SEC’s current agenda. Recent rules enacted under the Jumpstart Our Business Startups (JOBS) Act enable an emerging growth company to submit a draft registration statement for an initial public offering to the SEC for confidential nonpublic review. Ideally, the SEC will create a confidential filing process for Form D to further benefit start-ups.