Last week, the U.S. Securities and Exchange Commission announced that it had settled "charges" against two private companies and one registered investment adviser for failing to timely file Forms D for several unregistered securities offerings in violation of Rule 503 of Regulation D. 

I wondered how could the SEC actually enforce Rule 503's filing requirement when Regulation D is a non-exclusive safe harbor. After all, an offering that meets all of the conditions of Rule 506 should be exempt pursuant to Section 4(a)(2) (transactions by an issuer not involving any public offering) and the failure to file a notice should not change that. Then, I recalled that if an issuer relies on Rule 506(c), the condition in Rule 502(c) (no general solicitation) does not apply. Thus, it is unlikely that an issuer that engages in a general solicitation will be able to claim an exemption pursuant to Section 4(a)(2) or some other exemption. Sure enough, when I reviewed the actual orders, each recited that the issuer had engaged in general solicitation.

To settle the charges, the companies were forced to pay civil penalties of $60,000; $195,000; and $175,000. It is difficult to see how the investors in these offerings benefit by the SEC arrogating some of their investment dollars.

The SEC's orders assert that failure to file timely impedes its ability to fully assess the scope of the Regulation D market. I am not convinced. When the SEC adopted Form D in 1981, it did indeed claim data collection as its purpose. Release No. 33-6339 (Aug. 7, 1981) [46 FR 41791, 41799] ("An important purpose of the notice . . . is to collect empirical data . . ."). The SEC has now been collecting data for more than four decades. One might reasonably question whether the SEC has collected sufficient data. One might also question whether the SEC's desire for data outweighs decades of financial costs imposed on issuers. In fact, a quarter century ago, an SEC Task Force on Disclosure Simplification recommended that Form D be eliminated. Lastly, the SEC cannot "fully assess the scope of the Regulation D market" based on Form D filings because issuers may not file Form Ds when they have structured their offerings to meet the conditions of Rule 506(b) other than the Form D filing condition and chosen to rely on Section 4(a)(2).