Is it true that some seed financings do not constitute a public offering and so are exempt, not just from registration, but even from claiming and filing an exemption with Form D?
While in certain circumstances it may be technically "legal" to offer or sell securities in reliance on the broad "private placement" exemption, it is often much more desirable to only rely on the "safe harbors" that involve filing Form D.The question confuses a couple of concepts, so hopefully this will clarify a bit. All sales of securities involve an "offering," as you can't sell securities unless they are offered. The Federal rule is that all offerings (and sales) must be registered (registration is essentially what is involved in "going public") or exempt. One exemption, contained in Section 4(2) of the '33 Act, is that offerings that are not "public" are exempt from the registration requirement. If a securities offering is relying on 4(2), there is no requirement to file a Form D.So yes, technically certain offerings are so small and so private that they could fall under the 4(2) private placement exemption from the federal rules.BUT... how small and private do they have to be, and what about state rules?There are two problems with 4(2) private placements. One, there is very little certainty as to what the limits of a "public" offering are. There is virtually no guidance from the SEC, and the US Supreme Court has indicated that even an offering to one or two people might not be private if those people require the protection of the securities laws. Two, even though a 4(2) private offering is exempt from federal requirements, it's not necessarily exempt from state requirements. Thus, the SEC created a set of rules, called Regulation D, that establishes a set of "safe harbors" which companies can rely on to assure that they are within the meaning of a private transaction. These safe harbors are commonly known by their rule numbers: 504, 505 and 506. One of the requirements of these safe harbors is filing a Form D. The other benefit of these safe harbors is that if you are within them, any state registration requirements are pre-empted.Failure to stay within the safe harbors and instead relying on 4(2) can create a lot of problems.4(2) has other requirements that Reg D does not. For example, the whole offering needs to be private, not just the sales. The issuer needs to pra high level of disclosure in a 4(2) offering, whereas there is no disclosure requirement in a Reg D offering (so long as all purchasers are accredited). It's easy to run afoul of these rules, and there are no guarantees the SEC or a court might not later find the offering does not, in fact, meet the exemption, and order a reversal of affected transactions.Because of these dangers, investors and acquirers are much more reluctant to invest in companies where securities were offered in a 4(2) transaction. Often in connection with later financing a company will need to secure an opinion of counsel that the previous offerings complied with securities laws, and lawyers may not issue the opinion if the offering was in reliance on 4(2).Among other reasons, that is why lawyers are so insistent that all offerings and sales fit into Reg D. Other than a sale to the founders or something similar, virtually all private placements are under the safe harbors.Finally: anyone selling securities absolutely needs the advice of a business lawyer... it is complex and can carry very significant consequences. See my disclaimer below.