Regulation D and Form D Requirements for SAFEs

Please note: This information is provided for guidance purposes to help you understand the Form D registration process. Every business situation is unique, and laws can change. While I’ve made every effort to provide accurate information, you should verify current requirements and consider consulting with an attorney or business advisor to review and ensure compliance with all applicable laws and regulations.

Introduction

Simple Agreements for Future Equity (“SAFEs”) and convertible notes are securities regulated by the U.S. Securities and Exchange Commission (“SEC”) under the Securities Act of 1933 and the Securities Exchange Act of 1934. As a general rule, the SEC requires that the sales of securities be registered with the agency. There are, however, exemptions to this requirement, Regulation D being one of the most commonly applied to startups. Under Regulation D, companies that follow prescribed rules can raise funds without registering the subject securities, with the caveat that they provide notice to the SEC by filing a Form D.

Regulation D 506 Exemptions

Two rules under Regulation D, Rule 506(b) or 506(c), permit companies to raise unlimited funds if they meet specific criteria. According to Rule 506(b), companies conducting an offering can raise an unlimited amount of money and sell securities to an unlimited number of accredited investors – individuals having a net worth over $1 million, excluding their primary residence, or income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year. Companies are not, however, allowed to generally solicit or advertise to market the securities.

Rule 506(b) does allow companies to sell securities to no more than 35 non-accredited investors who meet the legal standard of having sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.

Rule 506(c) is a less commonly utilized exemption that allows companies to advertise to accredited investors. All purchasers in the offering must be accredited, and the company must take reasonable steps to verify the investors’ accredited statuses. A more detailed comparison of the two exemptions can be found here: Rule 506(b) vs. Rule 506(c) 

Filing Requirements – Form D

Under federal securities law, companies that have sold securities without registration in accordance with Rule 504 or 506 of the Securities Act of 1933 must file a notice of the exempt offering with the SEC using Form D. A company must file the notice within 15 days after the first sales of securities in the offering.

To file a Form D, a company needs first to obtain its own unique SEC identification number, also called a Central Index Key or CIK number, and a set of password-like “access codes” for the SEC’s EDGAR filing system. A company must complete and submit an application for EDGAR access online through Form ID. The application process begins here: Apply for EDGAR Access. 

Figure 1: Steps to Obtaining CIK Number and Access Codes

It is important to note that an applicant is required to print, sign, and notarize the application forms, so applying for access early is recommended. Many banks provide free notarization services for their customers.  Alternatively, the SEC will accept digitally notarized application forms; websites like notarize.com offer this service. A company can receive this information well before it anticipates needing to file a Form D notice.

With its CIK number and EDGAR access codes, a company can file a Form D with SEC by logging into the EDGAR system. It is highly recommended that a company collect the required information beforehand using a paper version of the form, as the system times out only one hour after the user’s last keystroke.

State Blue Sky Laws

Blue sky laws are state-specific legislation that regulates the sales of securities. The laws of the states in which the investors reside are what will likely apply to an offering. While federal securities law, like the Rules 506(b) and 506(c) discussed above, preempts blue sky laws, state notice requirements may still apply.

For example, if a Massachusetts company takes investment from a fund administered from Delaware, Delaware’s notice requirements and fees would apply to the investment. Delaware fees are 0.5% of the aggregate offering price of securities to be offered in the state, but not less than $200 or more than $1000. For an offering of $50,000, this equates to $250. A state like Maine, on the other hand, only requires companies to file a notice of an offering if the funding round has more than ten investors in the last consecutive twelve-month window.

The North American Securities Administrators Association Electronic Filing Depository (‘NASAA EFD’) is a centralized platform for filing all state notices, except Florida, and paying filing fees.

Conclusion

Navigating the SEC regulations for SAFEs and convertible notes requires attention to both federal and state requirements. While Regulation D exemptions provide valuable pathways to raise essential capital, startups must ensure timely Form D filing within 15 days of their first sale and comply with applicable state blue sky laws. Planning ahead, such as obtaining EDGAR access, can streamline the process. And remember, when in doubt, consult with counsel to ensure compliance.