#form d

[lindortech]

The curious case of Slack’s missing $162 million Slack has filed its S-1 registration statement with the SEC in preparation for its direct listing…

[value4money]

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Facebook Sells Nearly $13.8B in Equity in Conjunction with Merger (WhatsApp?)

Facebook revealed in a Form D filing with the Securities and Exchange Commission Monday that it sold nearly $13.8 billion of equity in the company, without registration, as part of a merger, likely its acquisition of cross-platform messaging application WhatsApp, which closed earlier this month.

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[seedinvest]

Proposed Form D Rules: The Good, The Bad and the Ugly

The proposed amendments to Reg D have sparked a lot of controversy.  Here's a run down of the Good, the Bad, and the Ugly from the proposal:

The Bad:

Advance Form D Filing: To use general solicitation (i.e. advertising) for your securities offering, an issuer will have to file a new Advance Form D, 15 days BEFORE any such general solicitation.  

Initial Closing Form D:  There is still a requirement to file a Form D within 15 days of the closing of the 1st round.  If all the required information was included in the Advance Form D, then no new filing is required.  Otherwise, an issuer will need to amend its Advance Form D after the 1st round.

Legends:  All written general solicitation will have to include the following lengthy legends.  Will a tweet with a link to these legends be sufficient?  It's unclear.

The securities may be sold only to accredited investors, which for natural persons, are investors who meet certain minimum annual income or net worth thresholds;

The securities are being offered in reliance on an exemption from the registration requirements of the Securities Act and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act;

The Commission has not passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials;

The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and

Investing in securities involves risk, and investors should be able to bear the loss of their investment.

The Ugly:

General Solicitation Filing Requirements:  Issuers will have to file all “written materials” used in general solicitation with the SEC on or before the date of the general solicitation.  This means that if you are sending a tweet at 11:59pm, you would have had to have previously filed the tweet with the SEC.  If you are sending a tweet at 12:01am, then you will have the next 23 hours and 59 minutes to file the tweet (how do you file a tweet?).

"Written materials" under securities law is a broad term capturing things like pitch decks, videos, TV appearances, webcasts, website content, tweets, facebook posts, recorded songs or anything else digital or broadcast.   The logistics involved in managing this requirement are going to be messy from both the SEC’s side as well as the issuer’s side.

Harsh Penalty:  If you fail to file a Form D or your general solicitation materials, the issuer and all of its affiliates will be barred from using Rule 506 for 1 year following making the appropriate filing or 5 years after the violation if you never make the filing.  This applies to both Rule 506(b) and Rule 506(c).  There is a 30 day cure period for late flings for a first offense only.  The penalty can be waived by the SEC upon a showing of good cause.

The Good:

Penalties Do Not Apply to Current Offering:  Failure to file a Form D or general solicitation materials will not bust your exemption for the current offering (but see above - you may be barred for 1 year on future offerings)

No Lookback Prior to Rule:  Contrary with others are reporting, you will only have to check on your Form D compliance starting on the effective date of the new rule.  This means that you will not have to go digging out your deal docs from 2008 - 2013 to make sure you filed your Form D.  The rules explicitly state that "disqualification would arise only with respect to non-compliance with Rule 503 that occurred after the effectiveness of new Rule 507(b).  The look-back period would not extend past the effective date of the rule, so issuers seeking to conduct a Rule 506 offering would assess compliance with Rule 503 by looking back only to the effective date of the rule."

New Information Requirements:  The Form D will have some additional information requirements as well as reduce the ability to decline to answer certain existing questions.   These requirements seem generally reasonable and will provide helpful information to the market and the SEC.  The requirements include:

A 506(b) or 506(c) checkbox

Types of general solicitation to be used

Steps the issuer proposes to take to verify accredited investor status

Details on planned use of proceeds (to the extent known, may be added by amendment later)

Information on control persons

Net asset value and revenue (if publicly known – you don’t have to disclose this if it’s not otherwise publicly available)

Private Filings: The Advance Form D and the general solicitation filings mentioned above are all private filings (no EDGAR).

Practical Options:

File an Advance Form D Immediately:  This will give you cover in the event of any accidental or inadvertent general solicitation.  Once you actually begin your offering you can amend the Advance Form D with more specific details about your offering. 

Start with a 506(b) and switch to 506(c):  It seems that you will be able to file the Advance Form D and still then choose to conduct a 506(b) offering instead by amending the Form D.  However, once you generally solicit, you will have blown 506(b) and will then be locked into a 506(c) offering.  So an issuer can switch from a 506(b) to a 506(c) at any time, but not vice versa.  

Use a Platform to Manage Compliance:  These regulations are fraught with traps and potential foot faults.  Using a platform like SeedInvest, with built in tools and safeguards to ensure compliance, may be the only manageable way to run 506(c) deals going forward.

Window of Opportunity:  All of these are proposed rules and likely will not be in effect when general solicitation goes live on September 23.  This means that for a certain period of time (30-90 days), there will be no specific filing requirements to use general solicitation.  If you are planning to raise funds for an issuer in the near future, you may consider launching on September 23 to take advantage of this window.

As a reminder, all of these are PROPOSED rules and therefore are not currently in effect and may change substantially before they are implemented.  We urge all interested parties to submit their comments to the SEC on these rules here.

  Kiran Lingam

[safdiepllc]

Support Form D Opacity!

CD Saved: The Barmitzvah Brothers, The Night of the Party

CD Recipient: Fred Wilson, Principal at Union Square Ventures

A privately-held business is under no obligation to publicize its financial results.  It has no requirement to disclose the closing of a material transaction.  On the contrary, it is often strategically important to keep this information under wraps.  

Why then are privately-held startups required to publicly disclose when they raise money from investors in a completely private offering?

A startup's typical vc or angel round offering entails filing with the SEC a Form D.  In the Form D, an issuer reports general information about the investment round, including the amount of cash raised.  Filed Form D's are available for viewing on the SEC's website.  Third party aggregators, like FormDs, make the process of Form D discovery even easier.  

For those running a startup, the adverse consequences of announcing these details are clear.  As young companies, startups must use every negotiating chip to their advantage.  But it is much more difficult for a startup to negotiate the best deals when its counter-parties are aware that it is flush with cash.  Also, as noted by Fred Wilson, among others, Form D public disclosure introduces timing complexities into messaging of what is typically a significant corporate event.  

To deal with these consequence, some startups seriously weigh noncompliance as a realistic option--an alternative with its own drastic effects.  Other startups may deliberately use a vague corporate name in an effort to skirt public notice.  But why should this be necessary?

The sole stated purpose of the Form D is to help the SEC and state regulators collect data about private offerings [see beginning section of SEC Release 33-8891].  But if that's the rationale, there is no reason the Form D needs to be public; it ought to be made confidentially to the SEC and state regulators.  

Beyond general prurience, there is simply little compelling justification for requiring a private company to publicly announce raising money in a private offering of securities.  I'm generally a big fan of transparency, but the cost-benefit analysis favors Form D opacity.

CD Saved: The Barmitzvah Brothers, The Night of the Party.  The Night of the Party is the first release of this Canadian band and showcases their self-professed "electronic-polka" phase.  Mind the dreamy, laconic delivery of Hebrew.  Standout tracks: "Sfog" and "Pump #4."

Congrats Fred Wilson, Principal at Union Square Ventures!  Sweet indie tuneage is heading your way!

[After recently marrying and moving into a tiny NYC apt with the wife, I've been tasked with reducing my personal possessions.  Rather than relegate my carefully curated CD collection to neglect on the shelves of a thrift shop or a dumpsterian fate, I've decided to give it away, one by one.  Listen with care.]