The Common Compliance Mistakes of Regulation D Offerings

Issuers of private offerings, such as Regulation D 506(b) or 506(c), can stumble across multiple opportunities to make errors. Avoiding these common mistakes is essential to the compliance of your offering.

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Many Reg D Mistakes are Avoidable

Over the course of launching your Regulation D 506(b) and 506(c) offerings, administrative tasks can feel like a distraction and a waste of time. On top of the typical administrative tasks, you must also pay attention to the compliance requirements of your offering. Form ID, Form D, and maybe even a Form DA need to be filed with the SEC and in many states where issuers have sold their offering and want permission to continue to sell. While these forms can be time-consuming to file, strict state rules exist to protect consumers and investors nationwide. To ensure compliance, states often administer fines and other penalties to non-compliant funds. Non-compliance is not only costly, but also affects the reputation of the issuer and their ability to sell securities at all.

It’s crucial to assess your offering correctly and ensure that you’ve taken the necessary steps for compliance. However, you won’t know each and every detail of securities laws in all 50 US states or have the time to research them all – that’s why we’ve collected some of the most common mistakes we see when working with clients on Reg D offerings.

Mistake #1: Filing Form D Incorrectly

Frequently, issues with Reg D filings originate from mistakes in completing Form D itself. For example, there may be simple mistakes like having parts of your address on the wrong lines, incorrect industry classifications, or reporting only entities as related persons. On the other hand, some issues are conceptual misunderstandings that demand technical knowledge of 506(b) and 506(c) reporting requirements and changes to legislation.

Senior securities paralegal Kathy Rasler reports that clients sometimes misinterpret the date of the first sale. She says, “sometimes clients believe that the date of first sale is when funds have been accepted by the issuer, but that’s not always the case.” The date of first sale is deemed to be the date on which the first investor is irrevocably contractually committed to invest. Oftentimes this happens once both parties have signed an agreement, such as a subscription agreement, and funds have been received.

Further mistakes in private offering filings include incorrect numerical records. The ‘Minimum Investment’ field, for example, is a common source of errorOftentimes issuers assume this figure would only include salaries. On the contrary, this figure should include all amounts paid which would include any incentives, bonuses, or other quantifiable gains.

Filing a Form D correctly requires knowing exactly how different pieces of information should be reported. Agile Legal’s experts stay up to date with regulatory changes to ensure your filings are correct and filed efficiently. Fill out our contact form to engage our team to correctly file your Form D on your behalf.

Mistake #2: Making Regulation D Filings in Unnecessary States

Some outside counsel will recommend filing in states where you’re not required to because it can seem like less of a hassle. According to Reyner Meikle, CEO of Agile Legal, “Counsel will often recommend over-compliance because of the cost of advice rather than reviewing the rules for each state to determine where you need to file.” However, this can lead to paying counsel for filings that you don’t need and associated state filing fees that can be avoided. For example, the De Minimis Rule means that you don’t have to file in a state where you have fewer than five investors in a 12-month period. Without having the proper knowledge about filing exemptions, issuers may end up filing when they only have one investor.

Filing in more states than required can also lead to complications and confusion when managing your offerings down the line. Over-filing leaves you with unnecessary ongoing compliance obligations and regulations to keep track of, as well as potential scrutiny from state regulators whose jurisdiction you don’t actually fall under. We all know that issuers are busy enough without unnecessary work adding to their burden and taking up time that could be spent more productively.

Mistake #3: Improper Research of Regulation D Requirements and Exemptions

Missing a filing or stating the incorrect number of sales can lead to serious consequences such as fines and other penalties, as filing your offerings is often a requirement for sale in many states. In worst-case scenarios, it can even lead to disbarment or recission – having to give the money back. While this is not usually the case, it is a risk that comes with under-filing and not being in compliance with SEC and Blue Sky laws.

This form of non-compliance can come from disorganization and inadequate research into which states need filing. Doing your due diligence and keeping track of the offering’s sales can prevent you from reporting incorrectly. In the case of non-compliance, you need to make, or amend, the required filings as soon as possible to avoid penalties being imposed.

Trusting the Right Provider for Regulation D Compliance Support

Trusting a legal service provider with your private offering’s compliance is a big step. You’ll be depending on your provider to protect your reputation and limit your liability if something were to go wrong. Agile Legal provides a team of experienced and dependable paralegals that have a deep understanding of Regulation D compliance requirements.

Collaborative, dedicated, and thoughtful are our core characteristics. Our fund services team is dedicated to researching and understanding the ever-changing regulations nationwide in order to relay the most accurate information to our clients. We assess and file your Form ID, Form D, and Form DAs with thoughtfulness and a detail-oriented mindset to reduce your risk of having to file unnecessary amendments. We’ll collaborate with you to monitor your offering’s sales and Blue Sky compliance across all US states after filings are complete.

You can feel secure knowing that your Reg D offering is compliant with both state and federal requirements. Contact us today to ensure your fund’s compliance and that you are able to sell your offering without anything standing in your way.

This blog provides general information and materials regarding the legal sector. The contents of this blog do not constitute legal advice. VPS Services, LLC d/b/a Agile Legal is not a law firm nor does it provide legal advice or practice law. You should contact an attorney to obtain advice with respect to any particular legal issues or questions.