Form D and Blue Sky Filings

Form D and Blue Sky Filings

05 August 2021

Main Contributor: Zachary Fenno, CSCP, Compliance Manager

Introduction

Private fund advisors have unique filing requirements, such as Form D, and Blue Sky Filings. In this article we are going to explain the two filings and the two exemptions commonly used by private fund advisors.

Purpose of Form D and Blue Sky

  • The Form D provides the SEC a notification of the fund’s exemption.
  • The Blue Sky Filings provide each state in which an investor resides notification of the fund’s exemption.

Accredited Investor Requirements

Investors for private placement made under Regulation D must generally meet the definition of an accredited investor.  A natural person can qualify as an accredited investor by satisfying certain income or net worth standards. For more information on what is considered an Accredited Investor, you can visit our blog post here.

Regulation D

Regulation D of the Securities Act of 1933 provides an exemption from registering private funds with the SEC. While Regulation D covers many different types of private placements, we are going to focus on those funds that fall under Rule 504 and 506 of Regulation D. Each Rule comes with its own restrictions and guidelines detailing how advisors can structure their offering.

NOTE: Not only do advisors need to comply with the federal regulation, but they must also be aware of each state’s requirements which we will discuss later in this article.

Rule 504 of Regulation D

A company that chooses to use the exemption provided under Rule 504 must limit the offer and sale of securities to $10 million during a 12-month period.

Public companies are not eligible for a Rule 504 exemption. Public companies include those who trade their securities on a national securities exchange like the NYSE or NASDAQ; companies with total assets greater than $10 million and a class of equity securities held by 2,000 or more persons or 500 persons who are not accredited investors.

Rule 506 of Regulation D

Rule 506 exemptions come in two primary forms through the 506(b) and 506(c) exemptions. One of the main differences between the two exemptions is that those using the 506(c) exemption may generally solicit the fund. Rule 506(b) does not allow general solicitation of the fund.

Rule 506(b)

506(b) offerings allow issuers (investment advisors/general partners) to raise unlimited funds to an unlimited number of accredited investors.  

Up to thirty-five (35) non-accredited investors who have a certain knowledge of the financial industry or business acumen in general are allowed to invest in the fund.  However, the following additional criteria must be met, which can be cumbersome and costly:

  • Must give any non-accredited investors disclosure documents that generally contain the same type of information as provided in Regulation A offerings (the company is not required to provide specified disclosure documents to accredited investors, but, if it does provide information to accredited investors, it must also make this information available to the non-accredited investors as well). If you are interested in learning more about what is required for Regulation A, you can start here.
  • Must give any non-accredited investors financial statement information specified in Rule 506.
  • Should be available to answer questions from prospective purchasers who are non-accredited investors.

Rule 506(c)

506(c) requires that all purchasers, or investors, in the offering be accredited investors. Since 506(c) allows the use of general solicitation, the issuer must take reasonable steps to verify the investor’s accredited status.  The SEC has provided some examples of methods that can be taken to verify accredited status.

To review on the basis of income:             

  1. Review two years of W-2 Statements, Form 1099 and/or K-1s along with a statement that the investor has a reasonable expectation to obtain same income level during current year

To review on the basis of net worth:

  1. Review bank statement, brokerage statements and/or other financial reports prepared by third parties current within 3 months along with a statement that the investor has disclosed all liabilities to report the net worth
  2. Obtain written confirmation for a registered broker-dealer, SEC registered investment advisor, licensed attorney, and/or CPA that they have taken reasonable steps to verify the investors accredited status within the three months prior to submitting

If the investor was an accredited investor prior to September 23, 2013 and continues to hold interest in private fund securities for the same issue and wants to invest in newly issues private fund securities for that same issuer, you need only obtain a certification that they meet the accredited status.

Form D – SEC Filings

Whether you are claiming a 504 or 506 exemption, you will need to file a Form D with the SEC within 15 days of the date of first sale. The SEC defines “date of first sale” as the date on which the first investor signs subscription documents. This means that you should be prepared to file a Form D before you get your first investor. Form D collects information about the issuer, related parties, solicitors, duration and amount of the offering, and the exemptions claimed.  There is no cost to file the Form D with the SEC.

Section 3(c) Exemptions

In addition to determining whether or not you are claiming a 504 or 506 exemption, the issuer will also need to consider whether any of the Investment Company Act Section 3(c) exemptions apply. These exemptions allow issuers to avoid having to register as an Investment Company with the SEC. Most companies that fall under these exemptions are generally known as “private investment companies.” Examples include hedge funds, private equity funds, venture capital funds or pooled investment vehicles where many investors combine their funds to purchase securities in private companies.

There are two primary structures for private funds:

  1. A 3(c)1 exemption limits the number of investors to 100.
  2. A 3(c)7 exemption requires all purchasers to be “qualified purchasers” without a limit on the number of investors. A qualified purchaser is an individual or family-owned business that owns $5 million or more in investments, not just net worth. If the qualified purchaser is an entity or family-owned business, that entity must not have been formed solely for the purpose of investing in a fund.

EDGAR

The Form D filed with the SEC must be filed through the EDGAR system.  In order to begin filing in EDGAR, you must create an account in the EDGAR system, which will take a few days to complete. You will need to go here to Apply for EDGAR Access.   This will bring you to a form you need to complete online and notarize.   

Some Important Tips:

  • Ensure before you log out of the program after initially filling out the form, that you save the filing to your server or hard drive. When you log back in to upload the notarized form, you can use the saved file to repopulate all items you had already completed.
  • When you apply, you will have to create a passphrase. Save your passphrase somewhere safe, as you will need these in the future if you ever forget your password.

After receiving your CIK from EDGAR (generally takes up to 48 hours) you will go here to generate your access codes. This consists of three other codes (PMAC, Password, and CCC) that are used to verify information across the EDGAR system.

Once you receive your EDGAR credentials you can begin filing your Form D!

Blue Sky Filings – State Filings

Once you’ve completed your Form D filing with the SEC and you have your first investor, you need to make a state notice filing, often referred to as blue sky filings, which based on the residential location of your investor(s). This includes all 50 states, Puerto Rico, and the Virgin Islands.  The only exception currently is Florida, which does not require blue sky filings.   Similar to the SEC requirements, you must make a notice filing with states within 15 days of the first sale of the issued securities within that state.  The only exception to this timeline, is for New York, which requires a notice filing 1 day prior to the first sale and Rhode Island, which requires a notice filing 10 days prior to the first sale in that state. 

The states have their own fees assessed for each Fund Form D filing.  It ranges and is either flat or tiered. 

In order to ensure that you are timely with all state filings, you should keep a list of all investors, the state in which they reside, and the amount sold within each state. Each state has its own information that it requires to be filed along with the Form D which typically includes the amount sold and number of investors in that state.

After your initial state notice filing you may need to make annual amendments or renewals. Some state filings expire after a year, while others last indefinitely. You will want to research each states Regulation D or Form D laws to determine when updates are necessary. You can also use the EFD NASAA system, discussed below, which will notify you when it is time to renew your filing.

You must notice file in Arizona and Maine through traditional USPS snail mail and include:  

  1. a copy of your Form D,
  2. a letter stating the number of investors and amount sold within that state, and
  3. payment for the required fee, which varies per state.

All other states can be filed through the EFD NASAA system discussed below.

EFD NASAA System

For states other than Arizona, Maine, and Florida, you can use the online EFD NASAA system. While some states allow you to notice file either via USPS or through this online system, many states are starting to convert to the EFD system and some even require it. The system is a simple, convenient way to file and monitor your state notice filings for your fund(s).

In order to use the EFD system, you will need to create an account. Once registered, you can search for your fund’s filing by using the CIK, Accession Number, or EFD number if you’ve previously made notice filings in the system for your fund(s). Once you have selected the states for which you will notice file, you will be asked to provide information per state including: (1) Number of investors in the fund; (2) Amount sold within the fund; and (3) Date of first sale within that state. The system walks you through the process of making the notice filings. Some states require more information while other states may not require any information at all.

After completing all required information, you will submit payments for the state assessed fees through the system.  This allows you to make one bulk payment if filing in multiple states instead of sending each individual state a check. The EFD system itself requires a one-time payment of $160 per fund. You will only pay this with your first notice filing for each fund.

After you’ve made your initial filing(s), the EFD system will summarize the states filed for each fund.  This is where you can monitor when notice filings expire and need to be renewed. The system can also send out weekly e-mails alerting you to any deficiencies in filings and required renewals. Once your fund is no longer accepting any more investors, you can submit a termination notice through the system, or let the notice expire naturally depending on the state.

What Do I Need to Do?

To make this process smoother for you and ensure your compliance with the requirements, we suggest the following:

  1. Decide which exemptions would best fit your fundraising needs. You may want to consult an attorney or compliance professional to help you determine what would best suit you.
  2. Draft your Form D before the fundraising so you prepared to submit timely.
  3. Develop and maintain a system of tracking investors by state and amount sold in each state. This will help you keep track of which state filings need to be made. Ensure the log is up to date so that when you need to make state renewal filings, you have the most accurate information.

What if I’m Late to File?

Don’t panic! Gather the information you’ll need to file a Form D and do so as soon as possible. The best you can do is make a good faith effort to complete all regulatory filings as soon as you can. If you notice file late on the state level, the state may come back to you requesting more information or asking you to pay a late fee. The information required will vary from state to state, but most will be willing to work with you to remedy the situation.  Additionally, draft up a memo internally to support the remedial actions taken to prevent this type of violation in the future.

Conclusion

Private fund offerings require you to make certain regulatory filings. You will need to do your due diligence to ensure you’re selecting the right exemptions that will meet your needs for your fundraising goal. Keep track of all investors, how much they’ve committed, which state they reside in, and the date of first sale. Utilize the EFD system to file and keep track of all state filings, except for those that are currently not using the system. If you’re taking these simple steps to keep yourself organized, you should be meeting all of your regulatory requirements when it comes to Form D and Blue Sky Filings!