After the SECs adoption of amended Rule 506(c) permitting general solicitation to accredited investors in private placements, the SEC has proposed (but not yet adopted) another rule-making foray designed to protect investors in such transactions. These protections were discussed at Practicing Law’s 45th Annual Institute on Securities Regulation, which concludes in New York today.
The first proposed protection is to require an SEC filing of an expanded Form D, providing details of the offering and copies of disclosure documents, at least fifteen days prior to commencement the offering.
But the most controversial protection would be to disqualify from 506(c) offerings any company that within the prior five years was noncompliant in its Form D filings (for prior placements). Although the present Regulation D exemption “requires” the filing of the present iteration of Form D (which provides certain basic information concerning a completed private placement), the failure to make such a filing does not in and of itself disqualify a traditional 506 private placement.
Apparently many commentators have objected to denial of 506(c) just because a company failed to file its Form D in a prior offering. Is such a disqualification too Draconian? Particularly since the present Regulation D exemption itself is not voided by such failure to file?
And if failure to file a prior Form D is to be a disqualification, is not five years too long? Should it not be, say, a one year prohibition?
The SEC staff noted that, in fact, it badly needs the information contained in a Form D to discharge its regulatory functions and to understand the capital markets; and, it noted rather plaintively, the filing of a Form D is in fact contemplated and required by the express terms of the Regulation D exemption.
Interestingly, if the disqualification from utilizing 506(c) survives the pending public comment period and becomes an SEC regulation, this will trigger a substantial change in the practice of many private placements; there will be a real penalty to not in fact file the Form D. Should this disqualification apply only prospectively, that is to say only to failures to file Form D for offerings after the new protections are enacted? Otherwise, a prior failure to file a Form D, thought at the time to be benign at the bottom line, may become a substantial denial of access to capital markets on an ex post facto basis?