A significant number of hedge funds, private equity funds and other private investment vehicles (collectively, "private funds") offer interests via private placements relying on Regulation D under the Securities Act of 1933 (the "Securities Act") as a safe harbor from the registration requirements of the Securities Act. In February 2008, the Securities and Exchange Commission (SEC) published a number of amendments to Rule 503 of Regulation D, which, at the time, had a limited impact on private funds.1 Rule 503 governs the notice filing—Form D—made by issuers to the SEC to give notice of a private placement in reliance on Regulation D. Many of the Rule 503 amendments will soon become operative and impose significant new requirements on issuers.
Mandatory Annual Updating Amendments to Form D
Beginning March 16, 2009, amended Rule 503 will require private funds that continue to offer securities in reliance on Regulation D to file an annual amendment to their most recent previously filed Form D. Private funds that have filed an initial or amended Form D during the one-year period prior to March 16, 2009, must file an amendment to Form D on or before the one-year anniversary of such filing. Private funds that filed an initial or amended Form D more than one year prior to March 16, 2009, are required to file an amended Form D prior to March 16, 2009. The annual amendment to Form D requires issuers to provide up-to-date information regarding the offering and to amend and restate their Form D in its entirety.
Other Mandatory Amendments to Form D
Unlike the previous requirements for amending Form D, amended Rule 503 no longer requires a separate amendment to Form D if the offering of securities terminates, or for changes to the following information:
- the address or relationship to the issuer of a related person identified in a previous Form D filing;
- the issuer's revenues or aggregate NAV;
- the issuer's minimum investment amount, if the change is an increase, or if the change, together with all other changes in that amount since the previously filed Form D, does not result in a decrease of more than 10%;
- any address or state(s) of solicitation for a person receiving sales compensation;
- the total offering amount, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed Form D, does not result in an increase of more than 10%;
- the amount of securities sold in the offering or the amount remaining to be sold;
- the number of non-accredited investors who have invested in the offering, as long as the change does not increase the number to more than 35;
- the total number of investors who have invested in the offering; and
- the amount of sales commissions, finders' fees or use of proceeds for payments to executive officers, directors or promoters, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%.
Note, however, that the requirement to amend Form D as soon as practicable after the discovery of a material mistake or error in their most recent Form D filing has not changed under amended Rule 503.
These revised interim amendment requirements became effective September 15, 2008, for issuers filing New Form D (discussed below) on or after that date, and will take effect March 16, 2009, for all issuers.
Electronic Filing Requirement
The amendments to Rule 503 introduced the ability to file Form D (including amendments) electronically. During a transition period that began September 15, 2008, the SEC allowed issuers to choose between continuing to file Form D on paper or filing electronically using the EDGAR system. On March 16, 2009, however, the SEC will no longer accept Form D via paper filings and will require that all Form D (including amendments) filings be made electronically on EDGAR.
To file Form D on EDGAR, issuers are required to use Central Index Key (CIK) and CIK Confirmation Code codes. Many private funds will already have these codes, as they are used for other EDGAR filings, such as Schedule 13D or 13G, or Form 3, 4 or 5 filings. Private funds that do not already have these codes must request the codes from the SEC by filing "Form ID," which provides the SEC with basic information regarding the filer. Because the process of obtaining these codes may take several days, private funds that have not already done so should consider making the initial amendment filing, if due prior to March 16, 2009, in paper format.
As for state law Form D filings required for "blue sky" purposes, the SEC is working with the North American Securities Administrators Association to integrate electronic filing of Form D on the federal level to allow for electronic filing with state securities authorities. Until state electronic filing is available, issuers will have to mail a printed copy of the Form D filed via EDGAR to the applicable state securities authorities.
Choice of Form D
Currently, issuers filing Form D by paper may choose to file either the pre-amendment version of Form D (a "Temporary Form D") or the new version of Form D ("New Form D"). Issuers filing electronically (including prior to the March 16, 2009) must use New Form D.
Changes to New Form D's Informational Requirements
Amended Rule 503 made substantive changes to Form D's informational requirements, including the following key changes:
In a departure from past practice, the date of first sale for an offering will now be the date on which the first investor is irrevocably contractually committed to invest, rather than the date of the initial closing. Based on the terms and conditions of the contract, the date of first sale could be the date on which the issuer receives the investor's check or subscription agreement;
- Issuers are no longer required to list and identify owners of 10% or more of a class of their equity securities as "related persons";
- Issuers must now identify their industry group from a specified list, rather than simply describing the issuer's business. Private funds will select "Pooled Investment Fund" and will be required to select from a number of additional options describing the specific type of pooled investment private fund and whether the private fund is a registered investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act");
- Issuers that are relying on an exclusion from the definition of "investment company" under Section 3(c) of the Investment Company Act must disclose the specific paragraph under Section 3(c) that they are relying on (for example, 3(c)(1) or 3(c)(7));
- Issuers are asked to disclose either (1) revenue range information, or (2) in the case of hedge funds or other pooled investment funds (other than private equity and venture capital funds), their aggregate net asset value range. In either case, however, issuers may "decline to disclose" such information;
- Issuers are required to disclose the CRD number of each registered broker-dealer that participates in the offering and each person that receives sales compensation with respect to the offering; and
- There is a new undertaking in the signature page to New Form D which requires that the issuer undertake to provide offering materials to the SEC and the states upon request.
1 Release No. 33-8891, (February 6, 2008).