On December 20, 2024, the SEC settled charges involving two private companies, as well as one Registered Investment Adviser (RIA), that failed to file their required Forms D in a timely manner. The RIA and the other companies were accused of violating Rule 503 of Regulation D.
Pursuant to Rule 503, all offers and sales of securities must either be registered under the Securities Act or fall within a registration exemption. Regulation D contains certain offering exemptions and a safe harbor from the Securities Act’s registration requirements. To protect investors and safeguard markets, an issuer that is offering or selling securities in reliance on one of those exemptions or the safe harbor, is required to file a Form D within fifteen calendar days after the first sale of those securities.
An issuer’s failure to adhere to the Form D filing requirements, or to amend its existing Form D filing, prevents the SEC from fully evaluating the scope of the Regulation D market. These evaluations are vital to the SEC’s assessment regarding whether Regulation D is appropriately balancing investor protection with the furtherance of capital formation, especially as it relates to small businesses. It also hurts the SEC’s ability to monitor and enforce compliance with the Regulation D requirements. In addition, the failure to satisfy Form D filing requirements has a negative impact on the ability of state securities regulators and self-regulatory organizations to monitor and enforce other securities laws and rules. Furthermore, these filing failures hamper the ability of investors and other market participants:
- To understand whether companies’ offerings are complying with federal securities laws;
- To research and analyze the Regulation D market; and to
- Report on capital-raising in industries that use Regulation D.
According to Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, Form D filings are crucial sources of information on private capital formation. Wadhwa explained that “Today’s orders find that the charged entities deprived the Commission and the marketplace of timely information concerning nearly $300 million of unregistered securities offerings.”
Form D filing failures by the RIA
The RIA that allegedly failed to file Forms D is based in New York City. The SEC’s complaint accused the RIA of violating Rule 503 under the Securities Act in connection with several unregistered securities offerings by issuers that the RIA controlled. Until March 31, 2024, the RIA was the investment adviser to several private funds that are structured as limited liability companies. The firm served as the managing member of each of these funds. The operating agreements for the funds designated the RIA as their managing member and made the firm responsible for the management, business, and affairs of each of them.
Under Rule 503 of Regulation D, an issuer that is offering or selling securities in reliance on Rule 504 or 506 must file a notice of sales on Form D with the SEC for each new offering of securities. The filing must occur no later than fifteen calendar days after the first sale of securities in the offering. While failing to provide this notice does not result in a loss of the registration exemption, the failure to comply with the requirements of Rule 503 violates the Securities Act and its rules.
Since November 2021, two private funds controlled by the RIA conducted unregistered offerings involving the sale of membership interests in them. The RIA contacted more than 285 prospective investors to solicit investment in the offerings. The firm raised at least $1,025,100 from thirty-four investors in the funds. Furthermore, the RIA engaged in certain communications that constituted general solicitation for these offerings. Therefore, the offerings could not have been conducted as exempt offerings under Section 4(a)(2) of the Securities Act. As the managing member of the funds, the RIA was responsible for ensuring that Form D filings were made in a timely manner. The RIA was sanctioned, because it failed to satisfy those requirements.
Because of this conduct, the RIA caused each of the funds to violate Rule 503 of Regulation D of the Securities Act. Although the firm did not admit or deny the SEC’s findings, the RIA did agree to cease and desist from violating the charged provisions and to pay $60,000.
Takeaways
The failure to file Form D, when required, harms investors and impedes the SEC’s ability to fulfill its mission. An RIA’s failure to file Form D in a timely manner is also likely to cause the SEC to scrutinize the firm’s compliance program to determine if there are lapses in other areas.
The SEC’s press release is available HERE.
Recent Comments