No Form D Filing - Now What?

In 1996, Congress added Section 18 to the Securities Act of 1933 as part of the National Securities Markets Improvement Act (NSMIA) to preempt state qualification requirements with respect to "covered securities", as defined.  Section 18(b)(4)(D) provides that a security is a covered security with respect to specified types of transactions.  One such transaction is a transaction under Rule 506 of Regulation D.

However, Section 18(c)(2) preserves state authority to require filing of any document filed with the Securities and Exchange Commission "solely for notice purposes" notwithstanding the preemption of state authority to require qualification with respect to "covered securities".   Although federal preemption is self-executing, California has reflected the fact of federal preemption in Section 25102.1.  With respect to Rule 506 offerings, the statute provides that an offer or sale will not be subject to qualification under the Corporate Securities Law of 1968 if, among other things, a notice "in the form of a copy of the completed Form D" is filed with the Department of Corporations within 15 days of the first sale in California.  The statute does not say whether the failure to file will subject the offering to qualification.   This is marked contrast to Section 25102(f) of the Corporations Code which provides that the failure to file a notice or to file a notice on time does not affect the availability of the exemption.

In my view, the failure to file, or the late filing of, a Form D will not necessarily subject an offer or sale to qualification in California.  My reasons are as follows:

• Preemption occurs pursuant to Section 18(b)(4)(D), not Section 25102.1.  Thus, California cannot condition preemption on filing even though it may require that a Form D be filed.
• Failure to file a Form D with the SEC, much less filing late, does not mean that an offering is not made pursuant to Rule 506.  S.E.C. Release No. 33-6825, 43 SEC Docket 704 (Mar. 14, 1989).  Thus, a security offered and sold in a transaction that meets the requirements of Rule 506 remains a covered security under Section 18(b)(4)(D) regardless of whether a Form D has been filed or filed on time.  This is consistent with case law in the federal courts outside of California.  See, e.g., Hamby v. Clearwater Consulting Concepts, LLLP, 428 F. Supp. 2d 915 (E.D. Ark. 2006); Chanana's Corp. v. Gilmore, 539 F. Supp. 2d 1299 (W.D. Wash. 2003); and Little v. Ressler Hardwoods and Flooring Inc., Case No. 1:08-bk-01878MDF, Adv. No. 1:08-ap-00109 (Bankr. M.D. Md. March 31, 2009).
• In most (but not necessarily all) cases, an offering that meets the conditions to Rule 506 will also meet the conditions for an exemption pursuant to Section 25102(f) of the Corporations Code.  As noted above, the failure to file a notice does not prevent an offer and sale from being exempt under Section 25102(f).

Although a failure to file or a late filing of a Form D in California may not affect whether qualification is required, this does not mean that issuers should not file on time.