The SEC doesn’t like your offering, and you should feel bad.
So you did a Reg. D offering, most likely under the very cool and very legal 506(c) exemption, and the SEC took notice of your timely filed Form D and looked into the overall offering materials. First, let’s thank the SEC for protecting the best interests of retail and institutional investors across the country. Thanks.
[in all seriousness, there are plenty of bad actors out there, and the SEC provides a very necessary service to unwary investors by staging these inquiries]
Now that that’s out of the way, what happens next? Let me tell you in six easy steps:
- You receive the initial inquiry phone call from a Washington D.C.-based number.
Who could be calling me at 3pm on a Thursday afternoon from the nation’s capital? A K-Street lobbying firm offering me a seven-figure salary for my non-existent intergovernmental savvy? No, it’s the SEC!
Here is how the phone call goes down (in my experience):
- They will confirm you’re the person who submitted the Form D or notice of offering on behalf of the issuer;
- They will ask some general questions to get a sense of the level of compliance and investor due diligence you implemented during the offering;
- They will try to make you put forward statements of fact regarding the offering, mostly in the realm of offering representations and mechanics. Be firm but non-committal; and
- They will politely invite you down to their offices to make a presentation on the totality of circumstances surrounding the offering.
As an aside, like any good Millennial I googled the number before answering my first SEC inquiry call, and the results indicated a potential scam number. I brought this up at the outset of my call with the SEC inquirer, and it completely derailed his intended oral exam because I refused to take him seriously until I received the official inquiry via the SEC portal. Feel free to use this stupid and accidental tactic at your own risk.
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2. You will receive a notice of inquiry through their scary and official SEC site.
This is a critical document outlining the nature of their inquiry. It is extremely important that you contact your securities litigation counsel immediately upon receipt, and provide them with all materials and contents of the discussion.
A fascinating and troubling aspect of the inquiry notice is that the nature of their inquiry is, by design, not readily apparent (i.e. what are they pursuing- litigation, fines, rescission [unwinding the transaction and returning the parties to their original positions], all of the above?). Your experienced securities litigators will try their best to deduce the SEC’s intent and respond accordingly.
3. The paper chase.
In all likelihood, you’ll be sending the SEC a wealth of information, and you should request to do this on a rolling basis due to the breadth of documentation. Beyond the offering documents, this will include any and all communications with investors. Along with the advertising materials, this will constitute a significant portion of the inquiry.
This is also a good time to address use of funds. As a wise attorney once said, please tell me you don’t have any receipts from the Mercedes dealership.
4. The impact on your company.
The inquiry will undoubtedly cast a pall over company operations, and it’s important to power through as best you can by continuing operations. A company that is subjected to an inquiry is akin to a company that’s caught a cold- you’re not firing on all cylinders, but you do your best to keep it together. The inquiry will last however long it lasts, and there’s no brightline cure. At least you have your $50k-$70k reserve fund for the securities litigators just lying around to comfort you, right?
5. Unless it’s an extreme case, don’t go visit the SEC in person, and never contact them except through counsel.
The plan is to limit the scope as much as possible by narrowly- but thoroughly- addressing each query raised via SEC inquiry. This is far easier to accomplish by submitting a thorough response in paper form, along with supporting documents, than by parading yourself in front of examiners with a PPT presentation. Your company may have a CEO who thinks they can march down to SEC headquarters and sort this out in an afternoon. There’s a reason why criminal defendants rarely take the witness stand during trial, guilty or not- from a defensive standpoint you should only provide the information you absolutely must provide, and do it through the proper channels. Don’t open the door all the way, as they say.
6. You’ve submitted everything, and the SEC doesn’t follow up with further inquiries or litigation.
Great, it’s all over! Just kidding, an inquiry is almost always open-ended. You will probably not receive notice that the inquiry is over, just a vague sense that they’re not paying close attention to you anymore. Your company is now on file, hopefully like in that scene from Raiders of the Lost Ark where they store the Ark of the Covenant away in a warehouse, never again to see the light of day.
However, take heart in the upside- virtually anyone who is anyone in the investment world has tangled with the SEC, and some say you’re nothing until you’ve appeared on their radar. Also, take pleasure in knowing that you don’t represent Elon Musk and won’t be spending the rest of your life at SEC HQ.
