If you’re raising private funds, you’ll have to ensure you comply with all filing requirements. These can include Form D and Blue Sky filings. But how do they differ and what do you need to know about them?
Read the rest of this article to dive deeper into Regulation D and Blue Sky filings.
What is Regulation D?
Regulation D is a Securities and Exchange Commission (SEC) regulation permitting companies to raise funds through private placements without having to register the securities with the SEC.
What is Blue Sky Filings?
All U.S. states have their own securities laws, which are called Blue Sky laws, that protect investors against any fraudulent activities. Blue Sky laws vary in different states, so there are different filing requirements.
How Do You File Form D and Blue Sky Filings?
When you complete a Regulation D offering, you’ll have to file Form D with the SEC. Then, you’ll have to complete your Blue Sky filings, based on where your investors are located.
Here’s how the process works.
Complete Form D
You have to file Form D with the SEC within 15 days after you’ve made your first sale of securities in the offering. If the due date is on a weekend day or holiday, it will be moved to the next business day.
When filing this form, you won’t be charged a fee.
You’ll have to make use of the SEC’s EDGAR (Electronic Data Gathering, Analysis and Retrieval) system when filing Form D. If you are new to EDGAR, you’ll have to submit Form ID so that you get access to EDGAR.
When you have been logged into the EDGAR system, you will select ‘Form D’ under the ‘Make a Filing’ section.
Comply with State Securities Regulations (Blue Sky Laws)
States have different securities laws, so it’s up to the company who is selling securities to ensure they are compliant with all state securities regulations.
Although offers and securities sales conducted under Rule 506(b) and Rule 506(c) aren’t subject to state registration and review, those offerings are subject to state requirements. What this means is that you might need to file a notice, as the SEC states. There could be fees involved.
If you need more information about this, you should contact the state securities regulators in your state.
What are Exemptions for Blue Sky Laws?
There are various exemptions for the registration mandate under Blue Sky laws. Some of these are related to Regulation D offerings.
- If the issuer is trying to raise an unlimited amount of money from accredited inventors, they don’t have to register the offering. This is known as Rule 506 of Regulation D.
- Convertible notes, which are sometimes used during the financing process of startups, can qualify for exemptions, as long as they were issued by the company and were converted into stock. Similarly, if they were issued in a private offering, such as Regulation D’s Rules 506(b) or 506(c). Convertible notes don't automatically qualify for exemptions. Rather, they must be issued with an available exemption.
It’s worth keeping in mind that even if your offering is exempt from SEC registration, you will have to stay informed about state-level compliant requirements, such as filing a notice. If you don’t comply, you can face hefty fines and rescission rights for investors.
What are Blue Sky Requirements?
Reg D offerings such as Rule 506(b) and 506(c) only need a notice filing in most states. This includes filing Form D and consenting to services of the process with the state. Form D must usually be filed within 15 days of the first sale.
Other offerings, such as Tier 1 Reg A offerings, are subject to state review, which could include a merit review. This is when the state regulator has to decide if the offering is fair to investors.
What Mistakes Should You Avoid with Blue Sky Laws?
To ensure compliance, there are some things to avoid so that you maintain compliance.
- Don’t assume that a federal SEC exemption means you don’t have to complete a state filing, such as for Reg D.
- Don’t miss the filing deadlines. If you don’t file your Reg D offering within 15 days of, or before, the sale, it could result in penalties of thousands of dollars.
- Don’t assume you can engage in solicitation. Reg D Rule 506(b) prohibits general solicitation. If you engage in it, you will lose the exemption, which will affect state pre-emption.
- Don’t think your filing requirements are done after the first submission. You might have to submit an amended filing. If you violate the ongoing requirements, you could face enforcement issues.
Do You Need a Lawyer for Regulation D?
Based on the complex rules regarding Reg D and Blue Sky laws, it’s in your best interest to work with a lawyer for your offerings. Here are some ways in which your lawyer will help you.
- They’ll help you choose the best Reg D offering for your business needs.
- They have knowledge of all state laws regarding securities so that you remain compliant.
- They’ll help you with all filings required, and ensure that you complete them on time.
- They’ll help you draft and review your PPM (Private Placement Memorandum) documents as well as others that are required for investors.
- They’ll coordinate your Blue Sky filings.
- They’ll help you navigate advertising your offering so that you don’t do anything that could put your exemption at risk.
- They’ll manage amendments should these be required for Form D, so that you remain compliant.
How to Hire a Lawyer for Regulation D
If you need to hire a lawyer, you can do so on ContractsCounsel, an online legal marketplace where clients can connect with experienced, vetted lawyers. They’ll structure your offering, ensure you remain compliant, and help you through every step of the Reg D process. They can also draft or review your documents to reduce your liability risk.
