Any offering of securities must either be registered (think IPO) or exempt from registration under both federal and state “blue sky” securities laws which are specific to the state in which the purchaser(s) reside.
Issuers are required to file a Form D to perfect the federal securities exemption under Regulation D, which is a safe harbor under Securities Act Section 4(a)(2). Any offering under Regulation D is also exempt from state blue sky laws.
A Form D is filed with the SEC using the online Electronic Data Gathering, Analysis, and Retrieval (EDGAR) submission tool, which means Form D submissions are publically available. Web crawlers can track Form D filings and write brief articles about a financing based on information inferred from a Form D filing. So, it is important to understand what disclosure is required in a Form D before determining whether the public nature of a Form D will deter a startup from filing.
The disclosure in a Form D includes, among other things, the issuer’s identity and contact information, the name and address of each of the issuer’s executive officers, directors and promotors (if applicable), the type(s) of securities offered, the minimum investment accepted from any outside investor, the total offering amount, total amount sold and total remaining to be sold and the total number of investors.
Although the disclosure in a Form D may seem like a lot, it does not include two important pieces of information that startups are often wary to disclose: valuation and the names of investors. The only information in a Form D that could be used to guess valuation is the disclosure regarding the size of the round. For a $10 million dollar round, for example, a Form D would only disclose that $10 million was raised. A Form D does not require the disclosure of the names of investors. However, as the names of directors are required, someone reviewing a Form D could use director names to determine the identity of any investor that has a board seat.
If the information noted above would still be considered sensitive then a startup may decide against filing a Form D.
An offering that otherwise satisfies the requirements of Regulation D but does not include the filing of a Form D should still be exempt under 4(a)(2) (the securities exemption being relied on in either case).
Therefore, in some circumstances, startups, their investors and advisors may get comfortable not filing the Form D when there is a desire to remain in “stealth mode”. The main downside of deciding not to file a Form D is that the state blue sky preemption is no longer available, meaning the issuer would have to satisfy state-level laws separately. For example, if the financing only involves a single investor based in California this is not problematic. The startup would simply have to file a notice in California under 25102(f). These notices are less public than a Form D filing, and are more likely to fly under the radar.
If the startup plans to issue a press release after the financing closes, then filing a Form D and ensuring the company can perfect the exemption may make sense, since it has already chosen to make information about the financing public. However, a startup planning to file a Form D may decide not to file until after they have issued a press release (in order to make sure they are the first source to publish information about the closing). Startups should remember that a Form D must be filed within 15 days after the first sale of securities in the offering.
Startups should make the decision whether or not to file a Form D in consultation with their legal advisors and investors. Ultimately, the decision often comes down to weighing the disclosure required in a Form D and the public nature of the filing against the stage of the company and its desire to remain stealthy.