Don’t Let Stealth Operation Jeopardize Securities Law Compliance

To avoid undesired publicity, startup companies that have just completed a financing event sometimes do not file a Form D notice with the Securities and Exchange Commission (SEC).  Generally, this is not the recommended course of action since a Form D filing is necessary to ensure federal and state securities law compliance for the financing. 

A Form D filing, which is publicly available and must be electronically filed on the SEC’s website, is required to comply with Regulation D.  VentureWire, blogs and other media sources routinely scan Form D filings for juicy information on the latest venture financings, including who is raising money, in what amounts and who joined the board of directors of a recently funded startup.  An article on the Philadelphia Inquirer’s website, for example, examines how Form D filings are used to gather information on private companies.  As a result, not filing a Form D with the SEC has gained currency within some circles during the past few years.

Failing to file a Form D, however, can create legal issues for a recently funded startup company if it is later determined that the stock was issued by the company without a valid federal or state securities law exemption.  This can give rise to the possibility of fines and penalties payable by the company, and more importantly, the investors in the financing may have the right to get their money back.  This can be a big headache for the company down the road when it is preparing for a new financing or liquidity event.

Unless there are valid grounds for determining that another securities exemption is available, we advise our clients to file a Form D notice within the required 15 days after a financing and to exercise publicity control by putting out a concurrent press release that announces the financing on the company’s own terms.

This post on Company Financings was authored by Daniel Green.



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