At a meetup yesterday, someone asked me to comment on the proposed SEC rules regarding Reg D and Form D. Here is what I jotted down on the spot as comments someone could submit to the SEC:
(1) The spirit of the JOBS Act was to make it easier for startups to raise money.
(2) Your proposed rules will make it much, much harder for startups to raise money.
(3) Your proposed rules create a lot of traps for the unwary. Many startups will inadvertently violate these rules and then be disqualified from raising money for a year. This will actually hurt the economy.
(4) The SEC has not done a good job of defining what actually constitutes general solicitation and general advertising, yet proposes to automatically disqualify companies from using Rule 506 for a year if they don’t file an Advance Form D 15 days before generally soliciting. This is totally unfair to companies.
(5) Demo days and investment forums and similar events are good for America. I think the point of the JOBS Act was to countenance these events. But your proposed rules would essentially make them illegal because many founders of startups will miss the Advance Form D filing inadvertently. This result is directly contrary to the spirit of the JOBS Act.
(6) You are asking startups (many of which have very limited financial resources) to spend thousands of dollars filling out forms before they have raised any money. This is unfair. Many startups that go out and try to raise money never succeed in doing so. This is another reason the post-sale Form D makes more sense than a pre-filing.
There is an argument going around that the proposed Reg D rules are not that bad because they affect only companies that are going to generally solicit their Reg D securities offerings.
This is simply not true.
The SEC’s proposed rules will adversely affect companies that are not going to generally solicit their offerings as well.
Even companies that don’t generally solicit their offerings are going to be subject to the potential one year penalty box if they miss their Form D filing deadlines. Sure, companies not generally soliciting won’t have to file “Advance Forms D,” but they will still have to timely file Forms D. The 15 day deadline, under the proposed rules, is going to become very real and very painful for companies that miss it.
Companies that are not generally soliciting will also have to complete the same Form D as companies generally soliciting. Under the proposed rules, the Forms D are going to require a lot more disclosure, and take a lot more time and expense to complete. This is another facet of the proposed rules that is not great.
Finally, companies that are not generally soliciting will also have to file terminating amendments to their Forms D, just like companies generally soliciting.
What bad part of the proposed rules will companies not generally soliciting escape? They will escape the following three requirements, which will apply only to companies generally soliciting:
- The requirement to file an Advance Form D at least 15 days before generally soliciting
- The requirement to prominently include lengthy legends on all written general solicitation materials, and
- The requirement to submit all written general solicitation material to the SEC prior to use.
Everyone in the startup ecosystem should care about the proposed rules, regardless of whether they intend to generally solicit or not. This is even more true because of the nebulous nature of what constitutes “general solicitation.” Many, many companies that don’t intend to generally solicit may trip inadvertently and fall into the rules governing companies that generally solicit.