Do Issuers Fail To File Form Ds Because They Fear Trolls?

A new paper ostensibly connects the dots between failing to file a Form D, as required by Regulation D, and "patent trolls".   A "patent troll" is a company, typically that does not produce any product or provide any service, that purchase patents for the sole purpose of suing other companies for patent infringement.   Puritan Medical Products Co. LLC v. Copan Italia S.P.A., 188 A.3d 853, 860 n. 11 (Me. 2018).  According to the authors, compliance with the Form D filing requirement carries some baggage. 

Although the Form D is fairly simple in its required disclosure (and free to file), its filing could result in adverse consequences.  First, the filing reveals to market participants that the firm has received funding.  The disclosure of a substantial capital raise may be viewed as a potential threat by competitors who may alter their behavior in response. Second, the filing brings the firm and its managers/board of directors to the attention of the SEC.  Third, filing a Form D reveals the possibility of deep pockets that may attract attention from entities seeking to extract value from the company through adverse means such as litigation.

 Hanley, Kathleen Weiss and Yu, Qianqian, Strategic Regulatory Non-Disclosure: The Case of the Missing Form D (Feb. 18, 2023).  In particular, the authors confirm that "patent litigators are attracted to firms that have larger cash reserves and also document that the filing of a Form D may attract the attention of patent trolls".

According to the authors, the level compliance with filing requirements in California is low:

Examining the exemption requests in California where most of our firms and investors are headquartered, we find that the majority of firms raising capital file neither a Form D at the federal level nor a limited exemption notice in California. This finding, coupled with the totality of our results, suggests that at least some issuers maybe relying on Regulation D as an exemption but not filing the form to ensure their privacy.

Thus, it seems that California issuers have taken Oscar Wilde's advice to heart: "Don't feed the trolls, nothing fuels them so much."