If issuers have to file Form D to easily sell shares of private company registered in USA , then are private company investments not "confidential?"

Question

If issuers of securities have to file Form D to easily sell shares or make private placements of private company registered in USA , then are private company investments not "confidential? because the Securities and Exchange Commission publicizes form D information and there are reporting requirements under sale of securities?

Answer 1

Answer

If issuers of securities have to file Form D to easily sell shares or make private placements of private company registered in USA , then are private company investments not "confidential?

This premise is false.

The practical reality is that corporate ownership and investment is more confidential and private in the United States than in any other major developed country (setting aside a few "tax havens" such as the Cayman Islands and Nevis, that cater to people who want to form asset protection trusts).

In practice, Form D is rarely used for privately placed investments in closely held companies (as opposed to "public offerings").

Legally, the theory is that these entities aren't required to register the securities pursuant to 15 U.S.C. § 77e of the '33 Act because they are statutorily exempt from the '33 Act because they are not being public offerings under 15 U.S.C. § 77d(2), so the SEC regulation requiring a filing of Form D doesn't apply to them, even though filing Form D provides a "safe harbor" in which the SEC consents in advance to the exempt character of the transaction.

Even if a statutory exemption does not apply, the downside of not filing a Form D is also pretty much just a modest fine in the vast majority of case where an SEC regulation exempts the transaction anyway. It is the policy (unwritten so far as I know) of the U.S. Securities and Exchange Commission to not routinely enforce the requirement of the filing of Form D in cases where the transaction would be clearly exempt in any case under an SEC regulation if Form D was filed. Basically, the SEC has bigger fish to fry.

The filing or non-filing of Form D does not impact one's liability under Regulation 10b-5 which imposes securities fraud liability enforceable in a private cause of action on all fraud involving securities including fraud in the sale of closely held companies.

Also, Securities and Exchange Commission Form D only contains private identifiable information about the issuer of the securities, not about the buyers of the securities. Form D is used to claim an exemption for an "offering" of securities in a particular time from by a particular issuer. An offering is an attempt to sell a bundle of securities of the same kind from the same issuer for a particular period of time to a particular "kind" of buyer, it is not a specific transaction with a particular buyer. The buyer generally isn't known when Form D is filed.

Relatedly, the identities of investors of less than 5% of a publicly held company are available in the isolated instances of proxy fights and for only a limited purpose. See here.

Other Legislative Disclosure Requirements

The CTA

A new federal statute, whose implementation was delayed, requires the disclosure of ownership of small privately held corporations to federal money laundering officials (the Financial Crimes Enforcement Network), but those filings, once in place, are not publicly available. This statute is the Corporate Transparency Act (CTA) (January 1, 2021) (it was a portion of the National Defense Authorization Act introduced in 2020, and passed by Congress with a veto override).

For entities first formed or registered on or after January 1, 2024, the initial report will be due within 30 days after formation. For entities formed before January 1, 2024, the initial report will be due on or before January 1, 2025. Specifically:

The law and related rules apply, subject to certain exemptions, to every entity formed by filing with a state office or registered to do business in a state. This means most common business entities, including corporations, limited partnerships, and limited liability companies, are subject to the law. Each such entity must file a report disclosing the identities of its beneficial owners. “Beneficial owner” means any individual who, directly or indirectly, either exercises substantial control over the entity or owns or controls at least 25 percent of its ownership interests. A “beneficial owner” can include an individual serving in a fiduciary capacity, such as a trustee of a trust. It can also include someone who does not have direct ownership, such as a beneficiary or settlor of a trust or someone who holds an interest through an agent, nominee, or custodian. The rule provides specific guidance for analyzing those relationships.

The report must provide each beneficial owner’s name, birthdate, and address, as well as a unique identifying number and issuing jurisdiction from an acceptable identification document (and an image of such document), such as a driver’s license or a passport. The information in the filed report is intended to be available only to law enforcement agencies and regulators, but the exact scope of its availability is as yet uncertain. . . .

More than 20 types of entities are exempted from the reporting requirements. Some of the more generally applicable exemptions include:

• Any company that has securities registered under the Securities Exchange Act of 1934 or files reports as a result of section 15(d) of that act;

• Any “large operating company,” meaning any entity that: employs more than 20 full time employees in the United States (not counting employees of subsidiaries or affiliates unless also actually employed by the subject company); has an operating presence at a physical office within the United States; and filed a federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales on a consolidated basis;

• Any entity that exercises governmental authority of the U.S. or of any state or political subdivision of a state;

• Any bank (as specifically defined in the regulations), credit union, bank holding company, or savings and loan holding company;

• Any entity registered with the SEC as a securities broker-dealer, investment company, or investment adviser;

• Any insurance producer licensed by a state and having a physical operating presence in the U.S. and any insurance company;

• Any PCAOB-registered accounting firm;

• Certain tax-exempt entities; and

• Any entity with ownership interests that are controlled or wholly owned, directly or indirectly, by one or more entities described above.

An “inactive entity” exemption applies if the entity:

• Existed on or before January 1, 2020;

• Is not engaged in active business;

• Is not owned, directly or indirectly, wholly or partially, by a foreign person;

• Has not had a change in ownership in the preceding 12 months; Has not sent or received more than $1,000 in funds in the preceding 12 month period; and

• Does not otherwise hold any type of asset.

State Law Disclosure Requirements

Some states (e.g. New York for limited liability companies) require the disclosure of who owns state entities, but the vast majority require only the disclosure of a registered agent and possibly an officer of the company whom third-parties can contact, with ownership remaining confidential in the books and records of the company itself only.

Disclosures For Tax Purposes

Ownership of passthrough entity ownership to tax officials is likewise required (and limited disclosure of C-corporation shareholders is sometimes required) but that is also confidential. This is because, subject to certain exceptions (e.g. for tax investigations), information obtained by the IRS in a review of a taxpayers records and their return information are confidential. 26 U.S.C. § 6103.

Federal Civil Litigation

Federal Rule of Civil Procedure 7.1 requires the disclosure of any parent corporation and any publicly held company owning more than 10% of the stock of a non-governmental entity that is litigating a case.

Subpoenas and Discovery

In many cases, a person with an actual need to know the ownership of a company in litigation can obtain this information by a subpoena issued in the case. Disclosures of entity ownership may also have to be made in the discovery and disclosure part of civil litigation.

Industry Specific Disclosure Requirements

Certain entities, such as Federal Communications Commission (FCC) license applicants, and applicants for marijuana business licenses in states where this is authorized by state law, must disclosure their ownership structure to regulatory officials, and sometimes this information is a matter of public record.