For years now, the so-called “Form D” has bedeviled companies wanting to remain secretive, because the regulatory filings alerted news reporters to their existence. Obtaining a Form D, however, was a cumbersome process for most of us, and so some companies managed to stay under the radar anyway.
However, now the SEC is proposing making the Form D’s available electronically, which if accepted, will make private companies and their venture capital investments much more visible than they were before. (See the proposed rule here)
Here’s how the arcane process works: To avoid registering their securities with the Securities and Exchange Commission, companies and their lawyers fill out Form Ds – or a Regulation D exemption. As Dan Primack at PE Wire explains this morning, the filings are only required after an initial sale of stock to investors, and are used by the SEC for two primary purposes: (a) collection of data for use in rulemaking efforts; and (b) enforcement of federal securities laws, including Regulation D.
Historically, Form Ds have been prepared and submitted in paper form, which has given a big advantage to the one company that could afford to have someone personally go scan them: Thomson Financial. As Primack, an employee of Thomson, explains:
The SEC then dumps them into cardboard boxes in its Washington DC reference room, for anyone masochistic enough to sort through them. Lucky for [PE Wire] readers, masochism is a job requirement at Thomson Financial [owner of PE Wire] – so the company has someone who scans every last Form D into its Thomson Research database. Actually, they first go into a server and then put into queue for the database, but I have access to the server. Good for me and good for you, dear reader.
The change by the SEC would make the documents accessible on an Internet-based SEC system (like Edgar, but probably not Edgar). Thomson, and employees Primack and his small crew who report on the venture financings, would lose the monopoly. [Update: Dan calls me on my use of the word “monopoly,” and points out that I could hire a couple of Georgetown University intern to go sort through the boxes for $150 a week. We stand corrected, but still believe that putting them online is fairer.] The SEC suggests the change would reduce filing fees and promote transparency, among other things. The SEC is soliciting comments on the rule-change, with a deadline of Sept. 7, not very far away.
This is obviously a very good thing, in our view. There’s the self-interested reason: It lets those of us with fewer resources compete against large financial corporations like Thomson. But more profoundly, it levels the field for everyone else, too.
Update II: Dan also notes how some secretive companies fudge the descriptions they give on the Form D, to avoid alerting competition. SpeedEdate Inc., which apparently raised around $2.8 million in a first round led by Menlo Ventures, describes its business as: “Design and manufacture of semiconductor components.” Quite odd, because it looks like an online speed dating startup. See screen show below.