How to delay your Form Ds (or not file them at all)

Startups in the Valley have learned how to quietly evade their mandatory SEC paperwork

Building a startup is incredibly tough. There are the constant ups and downs, the moments of sheer ambiguity and terror. And so, few moments in a startup’s life are as triumphant — and crystal clear — as closing a round of funding. Yes, yes, raising venture capital shouldn’t be celebrated as a milestone, and the focus should always be on product and users … but it just feels so damn good sometimes just to feel that sense of euphoria: I built something, and now others are giving me potentially millions of dollars to shoot for the stars.

Unfortunately, that clarity is increasingly vanishing. First, “closing a round” is rarely as sharp a distinction as it used to be. Seed rounds (and even later-stage rounds) are often raised over extended periods of time, with many partial closings conducted as new angels and seed funds come to the (cap) table.

Then there is also the growing disconnect between raising capital and the actual announcement of that fundraise. Founders are trying to remain under stealth for longer periods of time to hide from competitors, and they want to message their news in a careful manner.

All of which means that the Form D filed with the Securities and Exchange Commission when closing an exempt fundraise (aka venture rounds) is no longer as simple a process as it once was.

Lawyers will state publicly that startups should always file their legally mandatory paperwork (that’s probably also a good rule for life). The reality, though, is pretty much the opposite when you talk to startup attorneys in private.

Here’s the secret about Form D filings today: the norms in Silicon Valley have changed, and Form D filings are often filed late, not at all, and many startups are advised to lie low in the hopes of avoiding stricter SEC scrutiny. What was once a fait accompli is now a deliberative process, with important decision points for founders.

Extra Crunch contacted about two dozen startup attorneys, from the biggest firms in the industry to the one-person shops with a shingle out front. Getting straight answers here has been tough, if only because no lawyer really wants to say out loud that they actively recommend their clients violate government regulations (there is that whole law license thing, which apparently lawyers care about).

Practically all of these conversations were done off-the-record and not for attribution, since as one lawyer said, “the last thing I need is the damn SEC sending our firm a nastygram.” Other firms wholly swore us off from even discussing their Form D cultures.

Full disclosure: I am not an attorney, and while I had attorneys read over this draft, this does not constitute legal advice, particularly specific legal advice for your specific startup and situation. Get inspiration from this analysis, but always (really, truly, always) consult qualified legal counsel to answer legal questions about your startup.

With that said, here is our guide to the new world of venture capital securities filings.

What is a Form D, and what is the “classic” process for filing it

Let’s start with a simple example of how Form Ds work. You are a startup that has just raised $2 million in seed financing, and the whole round is going to close at the same time. The legal exchange that is happening between the startup and its VC investors is a trade of capital (i.e. cash) for securities (typically, but not always, preferred equity shares).

Securities law is very clear: all securities that are offered for sale in the United States must be registered with the Securities and Exchange Commission, unless the securities are sold under an exemption to the registration requirement. Registration is an onerous and expensive process, and so companies try to avoid registering (“going public”) until the last possible moment when they file their Form S-1 or equivalent.

The most common exemption (but not the only one) for startups has to do with selling securities to a limited set of accredited investors, which is commonly conducted under Rule 506 of Regulation D. If that $2 million seed round was only offered to a handful of investors in private, and if those investors are legally accredited (meaning they meet income and wealth standards), then the startup can be exempt from the requirement to register its sale of securities with the SEC.

Filing a Form D means setting a doomsday clock for your press efforts.

In lieu of a registration statement, startups must file a Form D with basic details of the transaction within 15 days of the first sale of securities. If a startup does so, it preempts almost all state-specific securities registration requirements, which generally lowers the complexity and legal costs of a transaction (you usually still need to file a copy of the Form D with each state you have investors in, though).

So this process is actually pretty easy. Raise money, close money, file form about money, continue building startup.

Challenge #1: on-going investment rounds and bad signaling

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The SEC is very clear: a Form D must be filed within 15 days of a round’s first sale of securities. That can be very complicated for founders — particularly at the seed stage — who raise and close capital multiple times within one round.

For instance, (and I am speaking from experience since data can be hard to gather here) many seed-stage startups today raise $1-2m over the course of a year. They might have some early angels willing to do part of the round, so they will do a first close to get that funding in the bank. Then they might get some other angels or maybe some seed funds involved over the next few months. Then as traction gets better, they might net some cash from strategics, who generally move slower than other investors.

The challenge when you fundraise this way is that there is huge signaling risk. Why have you been fundraising for so long? How many investors said no to you over those many months? Aren’t I about to invest in a lemon? And so founders try to be discrete about the timing of other parties to a round, and mostly try to focus on future growth rather than their peripatetic fundraise.

That’s easy to do when you control the fundraise deck. But if you file a Form D following that first close, then every investor that meets you in the future is going to know exactly when that first close was, how much was raised at the time, and how much more of the round you are still seeking.

In other words, that Form D filing is almost certainly going to make the rest of the fundraise much, much harder.

Challenge #2: timing PR and media outreach

Paul Bradbury via Getty Images

Form Ds are expected to be filed within 15 days of a round’s first sale of securities. What happens if you don’t want anyone to know that you have raised capital for a few months (or years) while you build out your product?

From experience, I can say that most startups want to delay the announcement of their financings for some time. When we see a PR announcement about a venture financing, it often happened months and sometimes even years (!) ago. A general rule of thumb is that a company will announce its fundraise — particularly at the earliest stages — when it is seeking its next round of capital.

Not committing securities fraud, not committing a potential felony, and not potentially opening yourself to legal liability has its pluses.

Form Ds used to be “hidden in plain sight” — meaning that they were filed, but no one paid all that much attention to them. These days, startup journalists and specialized financial data providers regularly trawl through the filings in real-time to find rounds of capital to write up as stories for sites like the one you’re reading right now.

Filing a Form D means setting a doomsday clock for your press efforts. Either you get your embargoes ready and your PR machine ratcheted up, or the Form D is just going to drop like a rock, and a bunch of journalists are going to write a piecemeal story based on the limited data the form holds.

Challenge #3: Oops, we forgot

Related to the issue of rolling closings, but sometimes in the morass of fundraising and the multiple attorneys involved with the paperwork, no one actually just sits down and ensures that a startup is filing the necessary docs with the SEC.

This happens particularly at the seed stage where startup founders are perhaps a little less experienced with mandatory disclosures, and their attorneys may not be the most up-to-date on startup and securities law (that’s why we offer our Verified Expert attorneys – so this never happens to you).

Approaching the Form D disclosure

Attorneys we’ve talked to (again, mostly without attribution given the sensitivity here) recommend that founders consider the risks of not filing a mandatory Form D with the SEC against the increased burdens of bad signaling and bad PR timing. This is balancing legal risk of annoying the SEC with the financial and publicity risks of not raising capital and being forced to shut down.

More realistically, the SEC does not have the resources to go after small startups raising small amounts of private money who delay their filings either.

There are no simple answers here, and different lawyers and founders are going to come to different conclusions for their own startup. Here are the approaches that startup attorneys are using today.

Solution #0: Just file the damn thing

Sort of obvious, but startups can always just file their mandatory paperwork with the SEC. That may be the boring answer when startup founders want to be rebels, but it does come with some nice accoutrements, namely, the ability to sleep well at night. Not committing securities fraud, not committing a potential felony, and not potentially opening yourself to legal liability has its pluses. And the SEC won’t send you a nastygram!

Summary: Read the single paragraph above.

Solution #1: Intentionally delay filing the Form D

Jay Clayton, chairman of the Securities and Exchange Commission (SEC). Andrew Harrer/Bloomberg via Getty Images

One approach recommended by a handful of attorneys in my research is to just file the Form D late, after the 15-day mandatory SEC filing window. That’s following the spirit of the rules if not the letter of their regulations, but it still gets the filing in eventually.

One consideration for this solution is deciding when the filing is realistically going to take place, and whether the intended delay is weeks or months after the first sale of securities. While the law doesn’t really care (it’s late either way and potentially punishable), answering a potential inquiry from the SEC is going to be much easier if the delay is short rather than long.

The good news though is that journalists (and I am speaking from experience here) almost never try to acquire state-level securities filings

The next consideration with an intentional delay is that even if you don’t file a Form D, plenty of people are still going to know about your fundraise, which means that news of it can leak out to other investors and the media. Rather than having control over the disclosure process, you might be suddenly scrambling to file a Form D because a smart sleuth at TechCrunch figured out your round took place (we’re sorry but not really sorry about that). Smaller rounds with fewer investors are probably safer here than party rounds with lots of investors involved.

Of course, an intentional delay is a willful one, and willfully and knowingly violating securities regulations is a felony. Felonies are bad, something that we seem to have to remind the startup community every once in a while. That said, it can be hard for the SEC or a court to determine that you willfully delayed, versus sort of unintentionally delaying a filing. More realistically, the SEC does not have the resources to go after small startups raising small amounts of private money who delay their filings either.

The safest option of course is just to file, but in terms of tradeoffs, delaying is probably going to get you the outcome you want in terms of signaling and PR without (hopefully!) a huge amount of legal headaches from the SEC. As one attorney put it to me who has many startup clients, they always recommend founders file on time (it’s the law, and they are a lawyer bound to it), but then show those founders how others in the Valley have approached filing and allow them to think through the option of strategically delaying a filing. Most founders, apparently, end up right here.

Summary: Mostly following the law, still comparatively cheap, and gives some control to the founder, but at the cost of potential leaks that (obviously) increase over time.

Solution #2: File under the broader 4(a)(2) exemption

As I mentioned earlier, there are multiple exemptions to registering a startup’s securities. While most startups have traditionally filed under Rule 506 of Regulation D, another approach is to instead file under the broader 4(a)(2) exemption (Yes, yes, I know, your eyes are glazing over).

Rule 506 provides what is known as a “safe harbor” — if you fulfill the rules of the exemption and file your Form D, then you are protected against any claims that your fundraise should be registered. As the SEC puts it, Rule 506 “…provides objective standards that a company can rely on to meet the requirements…” That means it is the least risky approach to guaranteeing that the fundraise doesn’t raise any yellow or red flags.

But, you don’t need a safe harbor. Under the securities laws, you can just “declare” that you followed the rules of 4(a)(2), and potentially litigate any claims in court or handle any SEC objections.

Since you didn’t file a Form D though through Rule 506, there is no longer preemption from state securities filings. That generally means you will have to file specific state forms in every state where an investor in the round is located, rather than (typically) just handing over your Form D to each regulator. If all of your investors are located in California, then this is a cinch, but if your investors are located in twelve states, that can be a lot of expensive paperwork to file.

The earlier you are, the less capital you raise, and the less investors you have — that’s when you have a spectrum of risk options to choose between.

The good news though is that journalists (and I am speaking from experience here) almost never try to acquire state-level securities filings, since the filings are much harder to get, require knowledge of the byzantine information systems of potentially all 50 states, and, well, many journalists don’t even realize these filings exist at the state level. So this is the “hiding in plain sight” option that still works pretty well.

Summary: Likely higher compliance costs and more open legal liability, but this is a fully legal route to having more control over disclosures.

Solution #3: Never file

Photo By Bill Clark/CQ Roll Call via Getty Images

Call this the infinite delay. More and more startups are using the Rule 506 option for exempting their securities from registration, but just never filing a Form D at all and instead taking an Elon Musk-style approach to the SEC. This is particularly true at the seed stage, where the dollar values at stake are likely below the levels by which the SEC really is going to spend time going after founders (note: not legal advice in the slightest).

Just as with delaying, this works best when the number of investors on the cap table are small, and are very sophisticated. If a single venture firm does your round, then the risk of having misunderstandings over a fundraise are much smaller and therefore the risk of not filing is lower. One attorney said that the number of investors is much more important that the size of the round in determining whether this is an appropriate strategy.

Like delaying, willfully failing to file mandatory securities paperwork is a felony. Unlike with delaying though, where the filing just came late, there is no plausible excuse if the SEC reaches out and asks why a round was closed under Rule 506 but no record of it exists (probably not a conversation you want to have).

Summary: even more legal jeopardy, but if you really want total and complete stealth, this is going to be your option.

So, what should you do?

Okay, so there are a bunch of challenges and solutions, so how do you parse all this?

Unfortunately, the answers are much more blurry for younger companies than older companies. The more capital you raise, the more investors you have, the more money and value that is at stake — the more that you should file a Form D, stat, and just get the regulatory process over with.

The earlier you are, the less capital you raise, and the less investors you have — that’s when you have a spectrum of risk options to choose between.

This is one area where having an attorney you trust and who is deeply experienced around startups is important. The filing decision is no longer a simple one, and has serious trade-offs that can be up to and including fines, jail time, and the failure of your startup. While you shouldn’t spend infinite cycles on the decision, neither should you outsource that decision without making your own judgment about what level of risk and tradeoffs you are willing to take. Demand answers from your counsel, and be sure that you are comfortable with all the upsides as well as potential consequences of the decision you choose.

It’s important to note as well that the norms have changed, and thus not all attorneys might be as “cutting edge” or up-to-date as others. And of course, the SEC and other securities regulators could — at any time — massively clamp down on this practice and cause massive problems for what I would estimate are thousands of startups who haven’t filed their proper paperwork.

Ultimately, protecting your startup is the most important duty any founder must do. These small legal decisions are exactly the kinds of decisions every CEO needs to be prepared to make as they grow their dream into reality.

Addendum: legal gray areas

Photo: Fry Design Ltd/Getty Images

One challenge I see with new founders as they mature is the realization that there is what the law says, and then what the law actually is as practiced by people in their industry. The law is a set of rules, yes, but it is also a set of norms.

Legal decisions cannot be outsourced, even if they are boring and at times perhaps trivial. Lawyers don’t just fill out paperwork, but are critical to strategizing on how to follow the law, the different paths available, and the tradeoffs incumbent on each one.

I think one of the worst UX experiences of building a company is that founders have to deal with an attorney when incorporating, a decision that these days is (almost always) pretty clear. Founders often have sticker shock at the price of incorporation (if they use a human attorney), and so they get in the habit of avoiding their lawyer to save on billable hours. Yet, incorporating itself has tradeoffs, and almost all legal decisions from that point forward are going to be much more complicated and require strategic advice.

I know plenty of founders who just get frustrated that, say, raising a round of capital still costs tens of thousands of dollars in legal fees. Yes, it is expensive, and maybe there are ways to create efficiencies. But there are a lot of choices to be made even with just filing disclosures as we just saw, and reasonable people with full clarity can come to reasonably different conclusions on how they want to approach it.

Addendum: Why doesn’t the SEC do something here?

I didn’t really spend a bunch of time on this question because it wasn’t too relevant to this guide. That said, it is an interesting and open question.

Form Ds are designed to give the public (and of course the SEC itself) some visibility into what is happening in the private markets. As more startup founders avoid these filings, all of us have less information about what is going on in the ecosystem, which in my view is to our collective detriment.

For instance, there has been something of a seed round implosion going on the past few years. It is basically impossible to know for sure, but I am convinced that a large part of this “implosion” is literally that the norms around Form D disclosures have changed, and therefore there is less raw data about investments in Silicon Valley, lowering some of these aggregate numbers.

The SEC has limited time and budget to investigate and prosecute these lack of filings. Maybe it should, or at least nail someone as an example to get these norms to shift back to more transparency. As an analyst, I would appreciate that, but even as a former VC, bringing back some clarity to the disclosure process would be supremely helpful I feel. Ultimately, this sort of laissez-faire regulatory ambiguity harms the ecosystem, and I don’t support it.