The Securities and Exchange Commission should take steps to better ensure compliance with Regulation D, to act when it finds non-compliance, and should make better use of Form D information.

That’s according to a March 31 report by the SEC’s Office of Inspector General, which reviewed Corporation Finance’s process for assessing whether companies appropriately use Reg D, the rule that allows exemptions from federal registration under the Securities Act of 1933 for limited offerings of securities.

The report found that Corp Fin doesn’t generally take action when it learns issuers haven’t complied with the requirements of the Reg D exemptions and doesn’t substantively review the more than 20,000 Form D filings it receives annually.

Last September, the SEC revised Form D to simplify the reporting process and eliminate some information and began accepting the form electronically, implementing a prior OIG recommendation. Mandatory e-filing of Form D to the SEC took effect March 16. The SEC also launched a system in March enabling the staff to analyze aggregated Form D information and develop management reports.

For securities law practitioners, the report serves as reminder to revisit Form D compliance on behalf of clients doing offerings to make sure the forms are done correctly, says Michael Littenberg, partner in the law firm Schulte Roth & Zabel.

The report includes 17 recommendations. Among other things, OIG said:

Corp Fin should develop a process to assess and better ensure compliance with Reg D and take appropriate action when it finds companies have materially misused the exemptions.
Corp Fin should establish a means to review aggregate Form D information and develop meaningful management reports.
CF and Enforcement should take appropriate action when issuers fail to file Form D in accordance with Rule 503. For example, CF could establish criteria describing when it’s appropriate to initiate an enforcement action against an issuer that fails to file a Form D, and request that a court enjoin an entity from violating the rule. Currently, OIG said issuers don’t face any tangible consequences for failing to file a Form D.
Corp Fin should raise with the SEC the option of making the filing of Form D a required condition for issuers to claim the Reg D exemptions in Rules 504, 505, and 506.
Corp Fin and the Office of Information Technology should make changes to further clarify Form D and better ensure that investors don’t rely on erroneous or misleading information, including adding a disclaimer that the SEC hasn’t necessarily reviewed the information.
CF and OIT should further simplify the EDGAR authentication process for new EDGAR filers.
CF should continue to improve coordination with State regulators on Reg D issues. In particular, OIG said coordination is needed to help the North American Securities Administrators’ Association, the organization of state securities regulators, in building an electronic system that could be linked to EDGAR to allow companies to file Form D electronically with the states.

The report also says the SEC should continue to discuss the merits of a proposed rule regarding Reg D and any changes that should be made to it.

Finally, OIG said Corp Fin should implement outstanding recommendations of a 2004 audit report to expand its review of registration statements to determine if companies file a Form D when required, and to track data on Reg D offerings. At the time, CF said the costs of implementing those recommendations outweighed the benefits.

In a letter responding to the report, Corp Fin noted that the SEC didn’t intend the form “to be a vehicle for detecting Regulation D violations or fraud or abuse in the sale of securities” or a “vehicle to provide disclosure to investors.”

“Form D does not require the type of information that could allow us to evaluate compliance … on a case-by-case basis,” the letter states. “… We will, however, weigh the potential benefits of your recommendation that we review Form D filings against the costs of such a review.”