When raising capital under Rule 506 of Regulation D, companies often weigh the pros and cons of filing a Form D with the SEC versus navigating state-by-state “Blue Sky” securities filings. Filing a Form D offers a significant advantage, particularly by granting “covered security” status under the National Securities Markets Improvement Act (NSMIA). This means that, rather than complying with the complex registration and qualification processes in multiple states, a company can simply file a notice and pay a fee in each state where the securities are offered. This streamlined process makes a Form D filing an appealing choice for companies raising capital across multiple states, as it simplifies compliance and reduces administrative burden.
However, filing a Form D does come with some downsides. For one, it requires public disclosure of certain information, such as the fact the company is raising capital, the amount of capital being raised, and the names of key executives, which may attract unwanted attention. Additionally, even though failing to file a Form D does not automatically strip the offering of its federal “covered security” status, some state regulators may still view the filing as necessary to bypass state-level registration requirements. This can create some uncertainty when dealing with state regulators.
In contrast, companies that choose to rely on state-by-state Blue Sky filings without filing a Form D (by using a Section 4(a)(2) exemption, for example) do not have the “covered security” status of the NSMIA, meaning they must navigate each state’s unique securities laws individually. This approach may be viable for small, local offerings but can quickly become expensive and time-consuming in a multi-state offering. Despite the information publicly disclosed in a Form D, many issuers find the streamlined process of relying on Rule 506 and avoiding extensive state regulations outweighs the potential downsides.